Ethnocentric vs. Regiocentric Consolidation in the Aerospace and

THE LONDON SCHOOL OF ECONOMICS
AND POLITICAL SCIENCE
The Boeing / McDonnell Douglas and EADS Mergers:
Ethnocentric vs. Regiocentric Consolidation
in the Aerospace and Defence Industry
and the Implications for International Relations
by
Ulf Gartzke
A thesis submitted to the Department of International Relations at the
London School of Economics and Political Science
for the degree of
Doctor of Philosophy
London, November 2010

Declaration
I certify that the thesis I have presented for examination for the PhD degree of the London
School of Economics and Political Science is solely my own work other than where I have
clearly indicated that it is the work of others (in which case the extent of any work carried
out jointly by me and any other person is clearly identified in it).
The copyright of this thesis rests with the author. Quotation from it is permitted, provided
that full acknowledgement is made. This thesis may not be reproduced without the prior
written consent of the author.
I warrant that this authorization does not, to the best of my belief, infringe the rights of any
third party.
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Abstract
This thesis relies on realist and neo-mercantilist approaches to explain the consolidation of the US
and European aerospace and defence industry during the second half of the 1990s. Based on two
case studies, the Boeing / McDonnell Douglas (BMD) merger in 1997 and the EADS merger in
1999, the thesis analyses the different political and economic motivations that led these aerospace
and defence companies as well as their respective home governments to pursue either ethnocentric
consolidation (in the case of the US) or regiocentric consolidation (in the case of France, Germany,
and Spain) strategies. The BMD merger is interpreted as an attempt by the American hegemon to
ensure that the important military, economic, and technological benefits derived from this strategic
sector continue to accrue, above all, to the United States and its aerospace and defence industrial
base. The cross-border EADS merger, in contrast, is viewed as a Franco-German-led
counterbalancing attempt to guarantee the survival and autonomy of the European aerospace and
defence industry, including Airbus, in the face of growing competitive pressures from the rapidly-
consolidating US mega-primes like Boeing. The thesis contrasts several high-profile transatlantic
M&A deals in a variety of business sectors with the marked absence of similar transactions between
US and European aerospace and defence companies. It thus highlights the strategic nature of this
particular sector as well as American concerns about the proliferation of advanced US technologies
to third countries, including to European NATO allies. Ultimately, realist and neo-mercantilist
arguments prevailed over liberal-institutionalist / globalisation arguments among policymakers and
business leaders on both sides of the Atlantic (especially in Washington, DC and Paris) – thus
paving the way for the BMD and EADS mergers.
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Acknowledgements
First and foremost, I would like to thank my LSE PhD supervisor, Professor Lord William Wallace,
who spent countless hours reviewing earlier drafts of this thesis. Without his superb intellectual
guidance and strong personal commitment to seeing me through on this challenging multi-year
endeavour, it would have been truly impossible to complete my thesis. In this context, I would also
like to thank my first two LSE supervisors, Professor Christopher Hill and Professor David
Stasavage, who helped shape my PhD research design at an early stage, before they both left
London.
Second, I would like to thank Professor Klaus Schwab as well as my former colleagues at the
World Economic Forum in Geneva, including John Moavanzadeh, Andy Richards, and Kevin
Steinberg, for all their crucial support in backing my initial PhD programme enrolment at LSE.
Third, I am grateful to the DAAD (German Academic Exchange Service) for providing me with
one of those rare full-tuition and living stipend scholarships to support my PhD studies at LSE.
Fourth, at Sciences Po in Paris, I am indebted to Professor Guillaume Devin, who, as my DEA
(MPhil) thesis supervisor first sparked my interest in the political, strategic, and economic
dimensions of the aerospace and defence industry. I am also grateful to Professor Bertrand Badie,
the head of Sciences Po’s DEA programme, for facilitating my successful integration into the
French academic system.
Fifth, I would like to thank Professor Jeff Anderson and his team at Georgetown University’s BMW
Center for German and European Studies for welcoming me as Visiting Scholar to conduct relevant
PhD research while living in Washington, DC. As a MSFS Class of 2000 alumn, I am a big fan of
Georgetown’s Edmund A. Walsh School of Foreign Service, where I am teaching a graduate-level
course on “The Aerospace and Defence Industry in a Globalised World”.
Sixth, I would like to thank my friends and former classmates at LSE, above all Dr. Steve Donzé
and Dr. Bastian Giegerich, for their personal support and encouragement during my PhD
endeavour. I am also extending a special thank you to many other friends and colleagues who
supported my PhD work in a variety of ways, including Dr. Dimitrios Argirakos, Alf Ivar Blikberg,
Dr. Arthur Brothag, August Cole, Professor James Davis, Anne Gantén, Dr. Olaf Groth, Dr. John
Hamre, Bjoern Hellmich, Bob Helm, Conrad F. Heede, Dr. Peter C. Hughes, Matthias Lohmann,
Dr. Maximilian Martin, Christoph Steinl, Steve Tebbe, Dr. Manfred von Nordheim, Christine
Walsh, Dr. Michael Werz, Dr. Cornelia Woll, among others.
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The final word of gratitude goes to my family, including my parents, my brother Jan, my sisters
Martina and Claudia, my parents-in-law Denise Baillargeon and John West, my aunt Annette and
her family as well as Estelle Baillargeon. The biggest thank you of all, naturally, belongs to my
wife Christiane. Her tireless prayers made sure that this thesis was finished against all odds. My
doctorate is dedicated to her and our two little children, Monika (“Kleine Maus”) and Maximilian
(“Max”), as well as baby no. 3 due Summer 2011.
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Table of Contents
Chapter 1: The Aerospace and Defence Industry in a Globalising World
1.1 What this thesis is all about p. 11
1.2 The economic and strategic importance of the aerospace industry p. 21
1.3 The consolidation of the US and European aerospace industries p. 33
after the end of the Cold War
1.4 International collaboration and governmental intervention p. 39
in the aerospace industry
Chapter 2: The Intellectual Battlefield: Competing Theoretical Frameworks
2.1 Bound to compete: realism and the BMD / EADS mergers p. 48
2.2 Bound to cooperate: neo-liberal institutionalism and the BMD / EADS mergers p. 70
2.3 Highlighting actors’ beliefs and identities: the role of constructivist theory p. 80
2.4 PhD thesis methodology: the case for case studies p. 92
Chapter 3: The Boeing / McDonnell Douglas Merger
3.1 Scaling back: the post-Cold War downturn in military spending p. 103
3.2 Corporate strategies to deal with the post-Cold War downturn p. 109
in defence spending
3.3 “The Last Supper”: how the US government promoted and constrained p. 113
aerospace and defence industry consolidation in the United States
3.4 The race to scale: US aerospace and defence industry consolidation p. 120
after the Cold War
3.5 Boeing, McDonnell Douglas and the “new” Boeing p. 123
Chapter 4: The EADS Merger
4.1 Aerospace and defence industrial consolidation, collaboration, p. 136
and competition in Europe
4.2 The failed EADC and BAe / DASA consolidation talks p. 151
4.3 EADS and its founding companies: Aérospatiale Matra, DASA, and CASA p. 156
4.3.1 Aérospatiale Matra (AM) p. 161
4.3.2 DaimlerChrysler Aerospace AG (DASA) p. 163
4.3.3 Construcciones Aeronáuticas SA (CASA) p. 164
4.4 The Galileo Global Navigation Satellite System p. 165
4.5 France’s unique approach to the aerospace and defence industry p. 172
Chapter 5: Going American: Explaining The Boeing / McDonnell Douglas Merger
5.1 The aerospace and defence industry: caught between two worlds p. 179
5.2 Growing foreign dependence of the US aerospace and defence industrial base p. 187
5.3 The rise of economic rivalries among Western allies in the post-Cold War world p. 197
5.4 Major transatlantic M&As after the end of the Cold War p. 202
5.4.1 The DaimlerChrysler merger: “a marriage made in heaven”? p. 203
5.4.2 Deutsche Bank’s take-over of Bankers Trust p. 206
5.4.3 Deutsche Telekom’s take-over of VoiceStream p. 209
5.5 Moving both towards and away from aerospace and defence p. 213
industrial globalisation
Chapter 6: Building Europe and Balancing the American Hegemon
6.1 The emergence of CFSP and ESDI p. 217
6.2 The ESDP breakthrough: from St. Malo to Helsinki and beyond p. 226
6.3 The US reaction to ESDP: “Yes, but…” p. 238
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6.4 Growing US unilateralism and the rise of transatlantic political clashes p. 242
Chapter 7: Action and reaction: the BMD vs. the EADS merger
7.1. Ethnocentric vs. regiocentric aerospace and defence consolidation p. 246
7.2 Safeguarding Europe’s aerospace and defence industrial base p. 250
vis-à-vis the United States
7.3 Britain and the US Defence Market p. 273
Chapter 8: Conclusion p. 279
Annex p. 293
Interviews / Bibliography p. 297
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List of Abbreviations
A&D Aerospace and Defence
AECA Arms Export Control Act
AECMA Association Européenne des Constructeurs de Matériel Aérospatial
AFL-CIO American Federation of Labor and Congress of Industrial Organizations
AFP Agence France Presse
AFSOUTH Allied Forces Southern Europe
AIA Aerospace Industries Association
AIC Airbus Integrated Company
AM Aérospatiale-Matra
AP Associated Press
AWACS Airborne Warning and Control System
AWST Aviation Week & Space Technology
BAC British Aircraft Corporation
BAe British Aerospace
BAE BAE Systems
BMD Boeing / McDonnell Douglas
BRIC Brazil, Russia, India, and China
BT Bankers Trust Bankers Trust
CASA Construcciones Aeronáuticas SA
CEE Central and Eastern Europe
CEPS Centre for European Policy Studies
CFIUS Committee on Foreign Investment in the United States
CFR Council on Foreign Relations
CJTF Combined Joint Task Force
CoC Code of Conduct
CRAF Civil Reserve Air Fleet
CSCE Conference for Security and Co-operation in Europe
CSIS Center for Strategic and International Studies
DAC Douglas Aircraft Corporation
DASA Daimler-Benz Aerospace AG / DaimlerChrysler Aerospace AG
DB Deutsche Bank
DCX DaimlerChrysler Corporation
DG Directorate-General
DGA Délégation Générale pour l’Armement
DITB Defence Industrial and Technological Base
DMZ Demilitarised Zone
DoC Department of Commerce
DoD Department of Defense
DoE Department of Energy
DoJ Department of Justice
DoS Department of State
DSB Defense Science Board
DT Deutsche Telekom
DTSI Defence Trade Security Initiatives
EADC European Aerospace and Defence Company
EADS European Aeronautics Defence and Space Company
EC European Commission
ECAP European Capabilities Action Plan
EDA European Defence Agency
EDIG European Defence Industrial Group
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EEA European Economic Area
EEC European Economic Community
EDA European Defence Agency
EDITB European Defence Industrial and Technological Base
ERRF European Rapid Reaction Force
ESCS European Coal and Steel Community
ESDI European Security and Defence Identity
ESDP European Security and Defence Policy
EU European Union
FAA Federal Aviation Administration
FCC Federal Communications Commission
FDI Foreign Direct Investment
FLA Future Large Aircraft
FMS Foreign Military Sales
FTC Federal Trade Commission
FY Fiscal Year
GATT General Agreement on Tariffs and Trade
GAO General Accounting Office
Government Accountability Office (renamed since 7 July 2004)
GD General Dynamics
GDP Gross Domestic Product
GE General Electric Company
GEC General Electric Company plc
GM General Motors
GIE Groupement d’intérêt économique
GNSS Global Navigation Satellite System
GPS Global Positioning System
ICBL International Campaign to Ban Landmines
ICBM Intercontinental Ballistic Missiles
ICC International Criminal Court
IEPG Independent European Programme Group
IFRI Institut Français des Relations Internationales
IISS International Institute for Strategic Studies
ILSA Iran-Libya Sanction Act
IMS Integrated Military Structure
IP Intellectual Property
IR International Relations
ITA International Trade Administration
ITAR International Traffic in Arms Regulation
ITC International Trade Commission
JSF Joint Strike Fighter
JV Joint Venture
KFOR Kosovo Force
LCA Large Commercial Aircraft
LMC Lockheed Martin Corporation
LSE London School of Economics and Political Science
MAD Mutual Assured Destruction
MBB Messerschmitt-Boelkow-Blohm
MBT Mine Ban Treaty
MC Military Committee
MDC McDonnell Douglas Corporation
MHT Matra Hautes Technologies
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MIC Military-Industrial Complex
MNC Multinational Corporation
MoD Ministry of Defence
MS Military Staff
MTU Motoren und Turbinen Union
NAC North Atlantic Council
NASA National Aeronautics and Space Administration
NATO North Atlantic Treaty Organisation
NDU National Defense University
NGC Northrop Grumman Corporation
NSA National Security Agency
OCCAR Organisation Conjointe de Coopération en matière d’Armement
OECD Organisation for Economic Co-operation and Development
ODTC Office of Defence Trade Controls
OMB Office of Management and Budget
OSCE Organisation for Security and Co-operation in Europe
OSD Office of the Secretary of Defense
OTA Office of Technology Assessment
P&W Pratt & Whitney
PSC Political and Security Committee
QDR Quadrennial Defense Review
RAF Royal Air Force
R&D Research and Development
R&DP Research and Development, Production
RMA Revolution in Military Affairs
RSI Rationalisation, Standardisation, and Inter-operability
R&T Research and Testing
RTD Research and Technology Development
SCE Single Corporate Entity
SDI Strategic Defence Initiative
SDR Strategic Defence Review
SEC Securities and Exchange Commission
SE societa europea
SIPRI Stockholm International Peace Research Institute
SNECMA Société Nationale d’Étude et de Construction de Moteurs d’Aviation
STP Strategic Trade Policy
SWF Sovereign Wealth Fund
TEU Treaty on European Union
TRP Technology Reinvestment Programme
UAV Unmanned Aerial Vehicle
USAF US Air Force
USG US Government
USTR US Trade Representative
VS VoiceStream
WEAG Western European Armaments Group
WEAO Western European Armaments Organisation
WEU Western European Union
WJC World Jewish Congress
WMD Weapons of Mass Destruction
WTO World Trade Organisation
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Chapter 1: The Aerospace and Defence Industry in a Globalising World
1.1 What this thesis is all about
In my PhD thesis at LSE I analyse the consolidation of the American and European aerospace and
defence (A&D) industries in the late 1990s. Based on two case studies – the 1997 Boeing /
McDonnell Douglas (BMD) merger in the United States and the creation of EADS (European
Aeronautics Defence and Space Company) in Europe in 1999 – I set out to to answer the following
questions:
Why did the Americans consolidate their A&D industry at a purely national level, with virtually
no involvement from other Western allies?
By contrast, why did the French, Germans, and Spaniards decide to merge their leading national
A&D companies into EADS?
What do these two case studies tell us about the potential for competition and cooperation in
international relations (IR)?
Are national security concerns the real reason or just a convenient pretext used by policymakers
and business leaders on both sides of the Atlantic to justify the treatment of the A&D industry
as a “special” sector?
The A&D business has three key characteristics that make it a strategic industry: “(1) it produces
goods or services directly related to national security; (2) it generates special benefits for the rest of
the economy; and (3) it is prestigious.” 1 As a result, the A&D industry has traditionally been
characterised by a high degree of governmental control and intervention. In this context, it is
important to differentiate between the commercial and the defence side of the aerospace sector. In
particular, what is the exact status of the commercial aerospace industry? Is it part of the private
sector in an open economy, or is it rather intricately linked to the public sector because of its
Research and Development, Production (R&DP) overlaps with military aviation construction?
This thesis explores whether neo-realism or neo-liberalism offers a better explanation for the BMD
and EADS mergers under review. In particular, it argues that the two case studies suggest that
transatlantic rivalries over the political, military, economic, and technological power and prestige
derived from the A&D industry exist even among close Western NATO allies. The thesis concludes
that the BMD and EADS mergers can best be explained by the fact that realist arguments prevailed
over liberal-institutionalist arguments among policymakers and business leaders in the countries
involved, especially in Washington and Paris. With the A&D industry caught between two very
1 Golich (1992) p. 910
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different worlds – realism and national security vs. liberalism, cooperation, globalisation and open
markets – political leaders and business executives in the United States and Europe put a premium
on the former, thus reinforcing the notion that this strategic industry sector remains of tremendous
importance for a nation’s military and “geo-economic” 2 security.
The United States was the first country to restructure and consolidate its A&D industry in response
to the new post-Cold War environment (sharp cuts in national defence spending, skyrocketing
R&DP, etc.). In doing so, Washington embraced what Keith Hayward has termed an
“ethnocentric” 3 consolidation approach; i.e., one that regards the retention of American control and
ownership over key companies such as Boeing and McDonnell Douglas Corporation (MDC) as
paramount to national security considerations. This ethnocentric approach to A&D industry
consolidation is fully in line with the key tenets of realism, which would posits that sovereign,
independent states will try to prevent strategic companies and entire industries of critical
importance to their national security and survival from coming under full or even partial foreign
control. In this context, one must not forget that during the 1990s, relations between Washington
and many of its European allies were strained over a number of issues, ranging from the Kyoto
Protocol to the International Criminal Court (ICC) as well as the EU’s attempt to establish a
European Security and Defence Policy (ESDP) to act independently of the US and NATO if
necessary. Given that America and Europe were no longer united by a common Soviet threat, but
found themselves increasingly at odds over the fundamental principles governing the exercise of
power in the international arena (unilateralism vs. multilateralism, etc.) – it is understandable that
Washington was not eager to provide the Europeans and their A&D players with the substantial
relative gains (in terms of access to US state-of-the-art technologies, etc.) that full-fledged
transatlantic mergers (of equals) would have entailed. Furthermore, the Clinton administration’s
neo-mercantilist agenda – defined as the attempt “to assure that the aeronautical capabilities
(technological, industrial, and commercial) of the respective countries are nurtured and protected
and given every advantage over their rivals” 4 – also played a role in shaping US industrial and
export promotion policies in the A&D sector.
In the case of the US, realism interprets the ethnocentric BMD merger as an attempt by the
American hegemon to consolidate and defend its dominant military, economic, and technological
2 “Geo-economics” – first developed in the 1980s / 1990s – is essentially “a concept based on a confrontational model
of international economic activity […] which posits a state of economic ‘warfare’ between leading countries. It is
argued that the US, the EU, Japan (and increasingly China) are essentially adversaries though the weapons in
countering threats to national security are economic policy measures rather than cruise missiles and stealth bombers.”
Cable (1995) pp. 305; 307
3 Hayward (1999) pp. 3-14
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status vis-à-vis all potential challengers, including NATO allies like France, Germany, and Spain –
the EADS founding nations. Realists fear that transatlantic defence mergers could potentially create
two major national security risks and vulnerabilities for the US. First, full-blown mergers between
US and European A&D companies could make the United States overly dependent on foreign-
based supply sources of critical military and commercial systems or components. Second,
transatlantic defence consolidation and integration could also increase the likelihood of
unauthorized technology transfers, not only from technologically more advanced US companies to
their European partners but also, and more importantly, from European companies to third
countries. For the American hegemon, the gradual diffusion of key technological capabilities to its
European allies and, possibly, to hostile third countries or non-state actors is of great concern
because it risks undermining one of the main elements of America’s dominance in the world today. 5
As stated in a 2002 USAF-sponsored RAND report on the implications of the globalisation of the
American A&D industry: “Globalisation’s most potent threat lies in its potential to equip hostile
nations and groups with advanced weapons and technologies designed by the United States and
paid for by the US government.” 6 As one analyst put it, “the development and exploitation of
technology tends to change power relations, whether these are social, economic, political or
military”. 7 For realists, national autonomy in defence R&DP is paramount as a basis for an
independent foreign, security, and defence policy. Even if from a primarily economic and business
perspective (i.e., the logic of a globalising world economy), a transatlantic merger between Boeing
and a European partner had made more sense than the BMD merger, realists would nonetheless
have predicted and advocated that Washington block such a move on national security grounds and
embrace an ethnocentric consolidation approach instead. 8
America’s European allies, in contrast, lagged behind the US and were in a largely reactive mode
when it came to post-Cold War A&D industrial consolidation. In this context, the EADS merger
involving three European “national champions” conformed to the model of a “regiocentric”
4 Thornton (1999) p. 72
5 “From a long-term strategic standpoint, globalisation’s most significant manifestation is the irresistible levelling effect
it is having on the international military-technological environment in which DoD must compete. Over time, all states –
not just the US and its allies – will share access to much of the same technology underpinning the modern military. [...]
[W]ith the whole world working from essentially the same military-technological ‘cookbook’, the [US] will need to rely
on its unique strengths as ‘chef’, that is, as the world’s most innovative integrator of militarily-useful – though not
always US-developed – technology.” Defense Science Board (1999), pp. v ; 29
6 (Lorell et al., 2003) p. xvii. This quote reflects a decidedly American ethnocentric as well as state-centric defence
industrial approach as it refers for example, to “advanced weapons and technologies designed by the [US] and paid for
by the US government” but fails to make a reference to the relevant contributions by relevant (foreign or domestic)
private sector companies.
7 Williams (1984) pp. 70-71
8 At the time of the BMD merger, national security hawks in Congress and at the State Department were the strongest
opponents of transatlantic mergers at the prime contractor level. The Pentagon, in contrast, was very open to such an
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company “blending strategic interests with regional integration / national sensitivity”. 9 Hayward
coined these concepts of ethnocentric vs. regiocentric A&D industrial integration during the crucial
1997-1998 period: after the BMD merger but before the creation of EADS. Like the creation of
BMD in the United States, Europe’s transnational EADS merger can also be explained by a
predominantly realist analytical framework. By pooling their major A&D assets into one company,
France, Germany, and Spain were trying to foster the creation of an economically and
technologically competitive European champion that would be able to survive the onslaught of the
emerging American mega-primes.
For the French and German private sector A&D firms (Lagardère and DCX 10 ) negotiating the
EADS deal, the merger was primarily about improving their relative international competitiveness
by gaining the critical mass necessary to realise economies of scale that could only be reached by
going beyond the confines of the existing “national champions”. Neither French nor German
business leaders involved had any interest in seeing the EADS merger foster a “Fortress America”
vs. “Fortress Europe” trade confrontation. Escalating protectionist sentiment on both sides
potentially risked severely hurting EADS’s bottom line. Furthermore, corporate A&D leaders in
Germany, France, and the UK shared a strong desire to gain access to the lucrative American
defence procurement market.
From the perspective of Europe’s political leaders, especially those in France and Germany, the
rapid ethnocentric consolidation of the US A&D industry appeared to be part of America’s
ambition to preserve its post-Cold War superpower status and prevent the rise of any potential peer
competitors (including NATO allies). Several factors both external and internal to the EU
(European Union) spurred the continent’s two leading powers – the Franco-German engine – to
venture into a political, strategic, and military territory (i.e., the EADS merger) where neither one of
them, nor any other countries in the world, had gone before. During the 1990s, with the Soviet
threat gone and America emerging as the world’s sole superpower, one witnessed transatlantic
tensions over a number of issues, ranging from the ICC and the Kyoto Protocol to the EU’s attempt
to build its own security and defence capability outside of NATO. The ESDP effort, in particular,
raised American suspicions that Europe was no longer merely a major economic competitor –
something that had already triggered US concerns in the 1960s and 1970s – but was now also trying
to position itself as a strategic competitor and possible counterweight to Washington.
idea (especially regarding a potential merger with BAe) as the military had a strong interest in fostering more
competition for US defence bids in an effort to get “more bang for the buck”. Hamre (2007)
9 Hayward (1999) p. 9
10 DCX = DaimlerChrysler Corporation
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The cooling in transatlantic relations made it relatively easy for France and Germany to come to
think of the US as “the other” – a crucial element in any collective identity-building process.
Therefore, transatlantic political differences with Washington, coupled with the preponderance of
US power in the international system, called for selective European counterbalancing against the
American hegemon. For sure, neither France nor Germany had the ambition or capacity to turn the
EU into a strategic / military peer competitor to the United States. However, the unwillingness and
inability of Paris and Berlin to transform the EU into a credible strategic rival to the US did not
mean that the two countries were not able to get their act together when core national security and
economic interests – i.e., the need to maintain technologically advanced and internationally
competitive A&D companies (including the respective national champions as well as Airbus) –
were threatened by US mega-primes. A fundamental change that occurred in connection with the
end of the Cold War was that Washington (through the Pentagon) had lost the strategic incentive to
support the European defence industrial base (including technology transfers, which had begun in
the 1950s), since the Soviet threat had disappeared and Europe was no longer the most important
strategic theatre for the US. The French response to the rise of the American mega-primes in the
1990s is reminiscent of General de Gaulle’s attempt to counter-balance the US in the 1960s, when
he “pledged to restore French greatness through technology, not empire” 11 . As a result, “the identity
of Gaullist France [became] wedded to the prestige and power of technological dynamism more
consciously even than Kennedy’s America” 12 .
The competitive threat posed by the BMD merger was compounded by the fact that any weakening
of Europe’s (relative) economic and technological position in the international A&D industry was
likely to have a corresponding negative impact on Europe’s ability to act collectively as an
independent security and defence player (i.e., outside of the American-dominated Atlantic Alliance
if necessary). For example, the 1999 Kosovo War served as a dramatic reminder of Europe’s
military and technological deficits vis-à-vis the US. Subsequently, the strengthening of European
A&D industrial capabilities became an important priority for policymakers in Paris, Berlin,
London, and beyond. In the wake of the Kosovo War, the EU’s major arms-producing countries
(France, Germany, UK, Italy, Spain, Sweden) repeatedly emphasised the crucial role played by the
A&D industry in providing the power-projection capabilities necessary to conduct EU-led security
and defence operations abroad.
11 McDougall (1985) pp. 179-180
12 Ibid., p. 180
15

This thesis analyses the complex relationship between the A&D industry and national governments
in Europe and the United States after the Cold War. The demise of the Warsaw Pact and the break-
up of the Soviet Union were followed by a sharp decline in defence and weapons procurement
expenditures (see Annex T able 4). As a result, both US and European A&D companies came under
tremendous pressure to cut costs and consolidate their operations through M&As. However, the
aerospace industries in America and Europe in conjunction with their respective national
governments adopted different strategies to cope with similar problems and challenges. The
Americans decided to go it alone and pursued the creation of “national champions” like BMD
through the promotion of large-scale national M&As. France, Germany and Spain, in contrast,
decided to move beyond the confines of “national champions” to create EADS, a “European
champion”. The stark choice faced by the Europeans at the time was either to join forces and merge
their national champions or risk becoming a junior-partner-type subcontractor to the Americans. 13
Boeing’s US$16.3 billion acquisition of MDC in 1997 is the biggest take-over in the US aerospace
industry to date. Both in terms of its size and its political-military implications, the BMD merger is
an important subject of academic scrutiny. In view of America’s global political, economic, and
military preponderance, US aerospace companies saw no need to look for partners abroad to
consolidate their operations, reap economies of scale, and improve their overall competitiveness.
Boasting an unparalleled technological lead and the world’s largest A&D market, the American
aerospace industry along with the US government decided that it was better to consolidate
nationally than to cooperate internationally. From a realist perspective, cooperation always carries
risks, notably in the form of cheating. Even if international cooperation works fine and produces
absolute gains for all parties, hegemonic powers like the US remain concerned about the potential
consequences of the weaker partners deriving relatively greater gains from cooperation, thus
precipitating the hegemon’s eventual decline. Historically, the transfer and diffusion of
technological innovations from the hegemonic core to the periphery has played a key role in the rise
and fall of great powers. 14 This point raises a further question: namely whether private-sector
multinational corporations (MNCs) share the same kind of strategic, long-term thinking as their
15 16 17 18
home governments or whether they are rather interested in short-term profit maximisation.
13 Key Western European countries and their A&D industrial companies had already faced this choice vis-à-vis
America since the 1960s (“le défi américain”). That being said, this issue became much more pressing and the choice
much more acute in a shrinking post-Cold War defence market.
14 Gilpin (1981)
15 “Because [MNCs] are the major force in international trade and are deeply enmeshed in local economies, they are
influential in national politics and essential to industry. But because they span national borders, many [MNCs] are less
concerned with advancing national goals than with pursuing objectives internal to the firm-principally growth, profits,
proprietary technology, strategic alliances, return on investment, and market power.” OTA (1993) pp. 1-2
16 The aerospace industry’s dealings with China would suggest the latter. After all, Beijing has been able to secure
favourable production sharing and final assembly deals from Airbus and Boeing as it played off the two Western
16

Even though America and its European allies were both part of NATO and had just prevailed over
the Soviet Union during the Cold War, the US adopted an A&D industrial policy designed to
preserve and advance the country’s hegemony for years to come. In fact, it is conventional wisdom
among conservative and neo-conservative thinkers that President Ronald Reagan’s massive military
build-up in the 1980s proved to be decisive in out-spending and out-researching the Soviet Union,
thus ushering in the end of the Cold War. “The US will need to redouble its efforts at out-
innovating, out-integrating, and out-investing its competitors.” 19 America’s go-it-alone approach
was driven by a concern that other major powers, including a resurgent Europe, could try to
counterbalance US hegemony. Washington’s unilateralism is evidence that its concerns were based
on a realist assessment of potential absolute and relative gains. The fact that the US consolidated its
aerospace industry at a purely national level is a stark reminder that uncertainty and distrust remain
powerful shapers of international relations, even among close allies. Warnings by Congress and the
Bush administration in 2004-2005, that Washington could sharply curtail transatlantic defence
cooperation if the EU were to lift its China arms embargo, illustrate that the US and Europe no
longer necessarily share the same strategic outlook. 20 21 22 23 This is particularly true with respect to
aerospace giants in their race to meet the country’s projected vast demand for commercial aircraft. Interestingly, similar
dynamics were already at play earlier, when Boeing and MDC also competed for access to the Chinese market: “For
weaker states, the industry’s strategic value is an added centripetal force, impelling them to seek participation in the
industry at any level. As a result of shifting power relationships, these relatively weak states may be able to coerce
dominant states to pursue internationalised production strategies. For example, […] China […] has benefited from the
competition between Boeing and [MDC], coercing each to establish joint venture projects that include various levels of
production in the PRC.” Golich (1992) p. 913
17
During the early stages of the Cold War, when the US was able to rely both on “structural hegemony” – “the
concentration of economic resources (i.e., aid, credits, markets) in a single state” – and “ideological hegemony” – “the
ability of the dominant state to convince other actors to accept its frame of reference as their own” – “to persuade
[foreign / allied] host governments and home offices [of US-based MNCs] to cooperate in extending embargoes and
export controls to its corporations abroad.” However, since the 1970s, “hegemonic decline and the global spread of
American business have placed an increasing proportion of US corporate decision making beyond the control of public
officials. MNCs cannot be seen simply as instruments of foreign policy but as independent actors whose autonomy
from state control can frustrate diplomatic preferences.” Rodman (1995) pp. 107 ; 137. However, Rodman’s
observation only holds true for “normal” US non-defence MNCs. The fact that all major US A&D companies are highly
dependent on the Pentagon’s vast and lucrative procurement as well as R&D budgets gives the US government
unparalleled leverage, and influence over this strategic industry sector.
18
“A number of studies have shown that since the 1970s, corporate managers have veered away from an ethnocentric
identification with American [C]old [W]ar aims and toward a self-conscious ideology of ‘business internationalism’,
which sought to isolate commercial and financial activity from political manipulations. Corporate spokesmen
increasingly asserted their willingness to deal with any state regardless of ideology and contended that diplomatic
hostility should not spill over into economic relations. Moreover, they characterised their operations in repressive or
hostile states as neutral and apolitical – a necessity for survival in an ideologically diverse world. This change in
corporate outlook, however, made it less likely that MNCs could be persuaded to act in ways that conformed to
American diplomatic aims.” Ibid., p. 112
19
Defense Science Board (1999) pp. 29-30
20
(Fata & Gaspers, 2005)
21
It is important to point out that various US administrations as well as Congress have long used double standards with
regard to third-party arms exports to China. On the one hand, Washington lashed out at Brussels and warned that the
US would sharply reduce transatlantic defence industrial cooperation if the EU were to lift its weapons embargo on
China imposed in 1989. On the other hand, however, Washington largely ignored and turned a blind eye on Israel’s
long-time track record of exporting advanced weapons systems including sensitive US technologies to China – often in
clear violation of US re-export regulations.
17

Asia, where America has a strong military presence while the Europeans focus primarily on their
economic and trade interests.
The 1999 EADS merger marked the first time that A&D companies from several sovereign
countries decided to fully merge their operations into one company. The gradual expansion of
political, military and economic cooperation through institutions like the EU, WEU 24 , and NATO,
as well as the Airbus consortium, created a new level of intra-European interdependencies that
helped to overcome traditional security dilemmas. This is the explanation put forward by neo-
liberal institutionalists belonging to the functionalist and interdependence school. From this
perspective, the process of European integration, developed through political, economic, and also
military institutions, played a key role in overcoming centuries of bloody conflicts and two
devastating world wars. Based on decades of mutually beneficial cooperation within the context of
European integration and Airbus, France and Germany concluded that their interests – defined
through national as well as European identities – were better served by merging their key aerospace
industrial assets into one “European champion” rather than pursuing the creation of different
“national champions”. Confronted with the choice between maintaining a nationally independent,
yet comparatively small and inefficient aerospace industrial base and creating a fully integrated
“European” aerospace company, France, Germany, and Spain opted for the latter.
Turning to the realist perspective on the EADS merger, it is relevant to note that the EADS merger
coincided with primarily French-led EU efforts to create an ESDP distinct from NATO. The
development of ESDP and the corresponding creation of EADS in 1999 were also triggered by the
BMD merger two years earlier. Faced with an America that could potentially dominate Europe both
on the politico-military level (NATO) and economic level (Boeing vs. Airbus, etc.) France,
Germany, and Spain decided to join forces to counterbalance American supremacy. Boeing’s
22 During the early stages of the Cold War, Washington “generally gained allied […] compliance [with US-led
sanctions regimes] despite significant differences over questions of both policy and law. In terms of policy the [US]
sought to forge a multilateral consensus behind policies of economic warfare against the Soviet Union and other
Communist states such as China and Cuba. In contrast, the allies generally preferred to limit embargoes to items of
direct military significance while encouraging the expansion on non-strategic trade. In terms of law, the [US] and its
allies disagreed as to whose legal system had the final authority over the foreign subsidiaries of US firms. The [US]
asserted that the nationality of the home office gave it the right to extend its law to the foreign operations of American
firms even if those operations have an adverse impact on important public interests (the effects doctrine) or national
security (the protective principle). The Trading with the Enemy Act and the Export Control Act gave the executive
branch the statutory authority to apply embargoes and export controls to foreign subsidiaries. Canada and Europe,
however, believed that jurisdiction should be determined by the territory in which a foreign subsidiary is incorporated
rather than the nationality of the home country. Consequently, they defined US claims of extraterritoriality as
infringements of their national sovereignty.” Rodman (1995) pp. 107-108
23 There is a long history of European suspicions that Washington used strategic embargoes like this to disadvantage
European companies in competing with US companies, as an outcome of industrial lobbying and campaign funding for
Members of Congress rather than the strategic / security reasons stated.
24 WEU = Western European Union
18

acquisition of MDC – the smallest of the three remaining manufacturers of large passenger aircraft
– effectively transformed the dogfight between Boeing and Airbus into a zero-sum game. If left
unanswered, the Boeing-MDC merger threatened to permanently tip the balance in favour of the
Americans, thus potentially forcing Airbus to gradually exit the market. From a realist perspective,
this rather confrontational “us vs. them” process of identity creation has traditionally been one of
the strongest and most effective drivers of international collaboration. The rationale behind EADS
was thus a combination of both business objectives – rationalisation, increased economies of scale –
and political objectives – fostering the process of European integration and providing the industrial
basis for a European security and defence policy distinct from the US.
The globalisation of the A&D industries – which gained momentum after the fall of Communism in
the 1990s – made both the US and its European allies increasingly dependent on “foreign
technologies, foreign-sourced products, or domestic-sourced products purchased from the local
subsidiaries of foreign corporations”. 25 As a result, policymakers and business leaders were forced
to strike a difficult balance between the competing demands of maximising economic efficiency
while at the same time minimising foreign control of their defence industrial base. From a purely
neo-liberal economic and business perspective, the nationality of the owners, managers, or workers
of a given A&D company do not matter that much. Defence procurement decisions should be
primarily driven by the desire to find the cheapest, most effective weapons systems available on the
market, irrespective of whether the company is foreign or domestic. 26 For economists, the
leveraging of international comparative advantages through the expansion of cross-border trade and
investment is the key to increasing a nation’s overall welfare. Costly experiments in industrial
policy, i.e., the creation of “national champions”, are “nothing more than new instances of old
attempts at protectionism and the preservation of inefficiency” 27 .
For national security strategists, in contrast, it is of utmost importance where production takes place
and who controls the process. The erosion of a country’s “capacity to build or replace critical force
structures independently of economic and political decisions of other sovereign powers” 28 poses a
serious potential national security threat. The creation of “national champions” in the A&D industry
in Europe in the late 1980s was partly driven by a neo-mercantilist agenda that strives to achieve
maximum national autonomy in key strategic industries. As one analyst argued, the worst fear of
mercantilists is that “dependence on foreign corporations whose key operations take place outside
25 Moran (1990) p. 57
26 “Left to themselves, defence companies will go as international as they can in their operations so as to maximise their
access to markets and minimise the price of their products.” Taylor (1990) p. 70
27 Moran (1990) p. 58
19

national borders opens up a real threat of interference on the part of their home country
governments.” 29 Mercantilism, the economic dimension of realism, also offers relevant insights into
the EADS and BMD mergers. From the 16 th to the 18 th century, the period that coincides with the
emergence of European nation states, mercantilism was the dominant school of economics. While
mercantilism never developed into a unified theory of economics, its various proponents shared a
common belief that the wealth, status, and power of a state are a function of its capital holdings.
Mercantilists also agreed on the zero-sum nature of the international economic system, where the
global volume of trade is “unchangeable” and where the gain of one country comes at the inevitable
loss of another. According to mercantilists, the best strategy for a country’s government to grow
and maximize its capital account surplus was to encourage exports and to discourage imports,
primarily through the imposition of high tariffs. In essence, mercantilism calls for a highly
interventionist economic and industrial policy, where the state creates national champions and
shields them from foreign competition.
Despite frequent public pronouncements in support of international trade liberalisation, political
leaders in key Western countries, especially in France and the US – have retained strong (neo-)
mercantilist and protectionist instincts, especially with regard to strategic industries like the A&D
sector. From a mercantilist perspective, the BMD and EADS mergers were designed to ensure that
a) the aerospace giants could reap economies of scale to become more competitive internationally
and to capture an ever bigger share of the world’s lucrative civil and military aerospace market; and
b) to allow each of the national governments involved to benefit from additional tax revenues, a
boost in employment, increased civil and military technological sophistication, as well as
heightened international prestige as a result of the commercial success of “their” respective
aerospace champion.
28 Defense Science Board (1988) p. 2
29 Moran (1990) p. 61
20

1.2 The economic and strategic importance of the aerospace industry
A comparative overview of the composition and value of both commercial and military US aircraft
shipments during the 1971-2006 period compiled by the US Department of Commerce (DoC)
illustrates the shifting relative economic weight of the two industry sectors as well as their increased
technological sophistication over time: 30
Year Military Aircraft Commercial Aircraft Total
Output Value (billion) Output Value (billion) Output Value (billion)
1971 2,914 US$8.4
8,142 US$3.0
11,056 US$11.4
(77 percent of total)
(23 percent of total)
(100 percent)
1988 1,210 US$43.7
1,800 US$12.1
3,010 US$55.8
(78 percent of total)
(22 percent of total)
(100 percent)
1999 359 US$35.8
3,440 US$45.2
3,799 US$81.0 (100
(44 percent of total)
(56 percent of total)
percent)
In 1971, America manufactured 11,056 aircraft with a combined value of US$11.4 billion. That
year, the commercial aircraft sector accounted for 8,142 units valued at US$3.0 billion; in contrast,
the US manufactured 2,914 military aircraft worth US$8.4 billion. Hence, the ratio between the
total value of military and commercial aircraft production in the United States stood at a stunning
77 vs. 23 percent in 1971. By 1988, at the height of President Reagan’s arms build-up, America
manufactured 1,210 military aircraft worth US$43.7 billion; in comparison, the commercial aircraft
sector delivered 1,800 units at a combined value of US$12.1 billion – thus putting the ratio between
US defence and commercial sales even slightly higher at 78 vs. 22 percent. By 1999, however, the
relative weight of the two sectors had shifted dramatically. Total aircraft deliveries reached 3,799
units, with a combined value of US$81.0 billion. The commercial sector accounted for 3,440 units
worth US$45.2 billion; in contrast, military aircraft production had dropped to 359 planes, with a
combined value of US$35.8 billion. So, just ten years after the fall of the Berlin Wall, the relative
dominance of military vs. civil aircraft production in the United States had been reversed (44 vs. 56
percent) – a development due to a combination of defence procurement cuts and a sharp increase in
demand for commercial aircraft. Between 1996 and 1999 alone, the value of annual US commercial
aircraft deliveries more than doubled from US$22.2 billion to US$45.2 billion.
Is the civil aviation industry part of the private sector in an open economy, or is it rather intricately
linked to the public sector because of its R&DP overlaps with military aviation construction? In a
1992 article which “uses commercial class aircraft manufacturing to focus on the dynamic
relationship between states and markets”, Vicki Golich writes:
30 ITA (2006)
21

“In the case of commercial-class aircraft manufacturing, structural changes in the
international system and industry dynamics act as centripetal forces impelling states and
corporations toward collaboration, while the industry’s strategic value acts as a centrifugal
force impelling protectionist policies designed to avoid perceived vulnerabilities associated
with mutual dependency.” 31
Several different, partly opposing forces have been shaping the commercial aerospace industry in
recent years and decades. At the international systemic level, Golich identifies the following four
centripetal forces:
“First, transnational interdependencies extend across an increasing number of political
boundaries and link a growing number of issue areas. Few national leaders believe that it is
possible to disengage from the network of economic interdependence. […]
Second, power capabilities are more equally, if still asymmetrically, distributed among
states. […] The growth of aerospace manufacturing capabilities in Europe and the newly
industrialising countries of Brazil, Indonesia, and Israel reflect this change. […]
Third, the large foreign debt that emerged as a structural problem in the 1980s depresses
purchasing power. […]
Finally, market dimensions are no longer delineated by a series of distinct national markets
linked by trade.” 32
Dramatically changing dynamics within the commercial aerospace industry itself have also acted as
centripetal forces pushing the companies concerned towards closer (national and transnational)
collaboration; i.e., FDI 33 , co-production and licensing arrangements as well as collaborative
undertakings to design, produce, and market aerospace products as well as systems: 34
“During the last fifty years the industry has been transformed into a sector characterised by
an oligopolistic production structure, an extremely high survival risk, and intense
competition for sales in a global market. […] Technological advances have extended
developmental lead time, increased launch costs, complicated marketing, and lengthened
the time between initial research and revenue earning.” 35
31 Golich (1992) p. 902
32 Ibid., pp. 902-903
33 FDI = Foreign Direct Investment
34 Golich (1992) p. 924
35 Ibid., p. 903
22

Virtually all of these industry dynamics are driven by the exponentially rising R&DP costs of
building next-generation aircraft. For example, the average commercial aircraft manufacturing costs
per seat increased from US$65,000 in 1970 to US$275,000 in 1991 – a more than four-fold increase
in 21 years. 36 As a result, soaring R&DP expenditures “have increased the proportion of launching
cost to equity from 42 percent (for the development of the Douglas DC6 in the 1940s) to 155
percent (for the development of the DC10 in the late 1960s and early 1970s)”. 37 Detailed shipment
statistics by the US Department of Commerce cited earlier also illustrate the exploding average unit
costs for both US commercial and military aircraft. 38 In 1971, the average US civil aircraft cost
US$367,000; the corresponding average figure for military aircraft stood at US$2.9 million. By
1987, the average price of a US commercial aircraft had skyrocketed to US$6.7 million; in
comparison, US military aircraft cost an average US$36.1 million. In 1999, US civil aircraft, on
average, cost US$13.1 million while the corresponding figure for military planes stood at US$99.7
million. 39
Pentagon procurement programmes have long been hampered by major delays and cost overruns: 40
“Every service has to some extent mortgaged its future by failing to contain equipment
costs, and by trading existing equipment and force elements to develop new systems that it
may never be able to procure in the numbers planned. These failures in cost containment
have been compounded by the failure to make realistic assessments of technology and
production capabilities, and the failure to set reasonable performance specifications and
then stop the grow of technological risk and even more demanding performance
specifications over time.” 41
“Almost every major aircraft development programme is in so much trouble that the
replacements are stuck in a morass of procurement and development problems, cost
explosions, and rifts within the [DoD] 42 . Fifth-generation tactical aircraft are affected by
significant delays and cost increases.” 43
36 Ibid., p. 907
37 Golich (1992) p. 906
38 ITA (2006)
39 In 1983, legendary US aerospace executive Norm Augustine pointed to the problems arising from the fact that unit
costs of next-generation military aircraft rise exponentially while defence budgets only grow linearly. Coining what has
become known as “Augustine’s Law”, he extrapolated this trend and took it to a tongue-in-cheek extreme: “In the year
2054, the entire defence budget will purchase just one aircraft. This aircraft will have to be shared by the Air Force and
Navy 3½ days each per week except for leap year, when it will be made available to the Marines for the extra day.” See
Law 16 in Augustine (1983).
40 Art (1972) pp. 95-114
41 (Cordesman & Kaeser, 2008) p. 1
42 DoD = Department of Defense
43 (Cordesman & Kaeser, 2008) p. ii
23

In civil aviation, Boeing’s Dreamliner and the Airbus A380 serve as reminders of how the multi-
billion dollar investments required for building next-generation aircraft as well as the extremely
complex production processes – which often cause costly delays – are even exposing the world’s
leading aerospace companies to major financial and business risks. It is precisely this high-stakes
tendency for aerospace companies to bet their future on the development of new aircraft that led
John Newhouse to title his classic study about the industry sector and the Boeing vs. Airbus
competition “The Sporty Game”. 44 Rising R&DP expenditures explain the cutthroat competition
between Boeing and Airbus as both are scrambling to boost profits by spreading their rising fixed
costs over an ever-larger number of sold aircraft units. This intense sales competition also accounts
for the fact that major acquisition decisions by airlines in Asia, the Middle East, etc. are often the
subject of top-level political lobbying by US / European officials trying to secure a deal on behalf
of “their” aerospace companies. “Successful aircraft sales depend on price, performance, politics,
and timing.” 45
“Perhaps ironically, the combination of dramatically increased risk and the need to sell
aircraft to a global market characterised by greater parity and proliferating
interdependencies among actors has impelled some state and corporate policymakers to
pursue collaborative production structures as a survival strategy.” 46
The highly integrated nature of the commercial and defence aerospace industrial base explains why
national governments tend to maintain close political and even direct financial links (through
shareholdings, etc.) with “their” respective aerospace companies.
“Despite the differing requirements for civil and military aircraft, the technology base,
much of the supplier base, and the skills and processes used are essentially common. They
become mutually supportive in attaining diverse civil and military objectives. The
technological synergies are very constructive. Military developments stress performance,
while commercial aircraft developments emphasise lowered production costs, vehicle
operating efficiency, and high availability with low maintenance – attributes that are
47 48
valuable to the military establishment.”
44
Newhouse (1982)
45
Golich (1992) p. 906. In this context, key performance indicators include “capacity and frequency demands; payload;
range; fuel efficiency; airport and environmental requirements; capital costs of acquiring the aircraft; training and
maintenance costs; and fleet standardisation and commonality within a single airline or among those that pool
equipment and ancillary services.” Ibid., p. 908
46
Ibid., pp. 909-910
47
National Academy of Engineering (1985) p. 101
48
“Currently, the fact that the two sectors share virtually the same production base supports the military-commercial
connection. Commercial design and production teams can and have developed military hardware. A complex
infrastructure of firms […] supplies sophisticated components, materials, and equipment including electronics,
24

Aerospace companies also deliver significant economic benefits for their home countries (export
earnings, jobs, technology clusters, etc.), thus providing additional mercantilist incentives for
national governments to keep a particularly close eye on firms in this sector and to prevent them
from simply falling into the hands of foreign competitors (see Annex Table 1, 2, and 3). In
America, the sector has been the most important industrial contributor to US export revenues since
the 1950s. 49 If the commercial aerospace business were a “normal” industry sector in a globalised
economy, one would certainly expect to see large-scale cross-border M&As leading to the creation
of fully-integrated multinational civil aerospace firms. However, with the exception of EADS, that
has not (yet) happened. Things are made more complicated by the fact that virtually all of today’s
major aerospace companies – with the exception of Lockheed Martin (LMC) have sizeable
commercial and defence operations. Therefore, governments on both sides of the Atlantic do care
how and what their aerospace companies are doing. To a certain degree, it is fair to say that the US
government has generally adopted a more laissez-faire-dominated approach towards the aerospace
industry than its counterparts in Europe. Unlike Paris, Washington holds no direct equity stake in
any major A&D group. That being said, however, it is also quite clear that the US government does
not view these companies as part of a “normal”, non-strategic industry sector which should simply
be left to the competitive dynamics of the global markets place:
“US decision-makers remained convinced that mutual economic dependency created
undesirable vulnerabilities and that the state should intervene in the private sector only to
achieve national security-related goals.” 50
“US corporate behaviour has been affected by the prevailing American political ideology,
which views cooperation suspiciously and has historically placed a higher priority on
political-military security than on economic relations.” 51
Nonetheless, American commercial aerospace companies did significantly expand their
transnational collaborative production strategies during the 1980s and 1990s. 52 This shift towards
more internationalised production structures was partly driven by the rapidly increasing share of the
aircrafts’ overall production value that was outsourced / offshored to subcontractors located in
communications equipment, and scientific instruments to both sectors. […] Market requirements have triggered
technological and product advances relevant to military needs and vice versa. Together, these factors reduce the cost of
providing an essential military industrial base.” Golich (1992) p. 911
49
Ibid., pp. 911-912
50
Ibid., p. 918
51
Ibid., p. 921
52
These cross-border arrangements were primarily based on co-production agreements rather than joint R&D
programmes, which are politically much more sensitive and potentially involve technology transfers harmful to US
national security interests. Ibid., p. 927
25

Europe, Japan, China, etc. 53 54 So again, what is the exact status of the commercial aerospace
industry? Is it part of the private sector in an open economy, or is it rather intricately linked to the
public sector because of its R&DP overlaps with military aviation construction? On the one hand,
all major US aerospace companies are fully privatised and even in Europe, traditionally more
interventionist governments in France and Spain have agreed to at least a partial privatisation of
their country’s A&D base. At first glance, aerospace giants such as EADS and Boeing thus appear
to be part of the private sector in an open economy. Both firms are listed on the stock market and
their top management and supervisory boards are appointed by the shareholders. At the same time,
however, the strategic, economic, and technological importance of integrated commercial A&D
companies such as Boeing and EADS makes them subject to political interference by their
respective home governments. Political decision-makers in Washington, Paris, Berlin, London, etc.
do care about how and what “their” A&D players are doing. 55 56 At the same time, these corporate
players also exert political influence in a two-way relationship: the “Military-Industrial Complex”,
the money Boeing and other major A&D companies spend lobbying on Capitol Hill, etc.:
“[D]efence contractors lobby Congress constantly and aggressively; their skill in dealing with the
government is in fact one of their core competencies.” 57 In the US, the sharp reduction in the
number of prime defence contractors after the end of the Cold War and the corresponding loss of
competition over major procurement programs has led to even closer ties between industry and “the
state”:
“Competition barely exists in the defence industry and is growing weaker by the day. It was
a different story just two decades ago. In the 1980s, 20 or more prime contractors competed
for most defence contracts. Today, the Pentagon relies primarily on six main contractors to
build our nation’s aircraft, missiles, ships and other weapons systems. It is a system that
largely forgoes competition on price, delivery and performance and replaces it with a kind
of ‘design bureau’ competition, similar to what the Soviet Union used – hardly a recipe for
success. […]
The United States is approaching an ‘arsenal system’ for developing and producing its
weapons – that is, one in which the government manufactures its own weaponry. […]
53 “[T]he proportion of subcontract work has risen from a typical level of 40 [percent] for the Lockheed Electra in the
1950s, to over 70 [percent] for the Boeing 747”. Hayward (1986) p. 27
54 Furthermore, “primary US incentives [to pursue transnational production processes] include financial support [from
governments of programme participants], avoiding potential European tariff barriers, nullifying or diluting competition
from European firms and avoiding antitrust restrictions.” Golich (1992) p. 923
55 “In each country, the [g]overnment “accepts or denies the setting up of armaments activities on its national territory,
and therefore has a decisive influence on any restructuring process of its defence industry, regardless of the legal status
of the companies”. Van Eekelen (2005) p. 5
56 London retains Golden Shares in BAE, Rolls-Royce, etc.
57 (Gholz & Sapolsky, 1999/2000) p. 16
26

Unless we act soon, we may find that the only solutions available will be to nationalize the
military industrial base or to ‘outsource’ production of our weapons systems, with excessive
portions of that work going overseas. 58
Government intervention in the A&D industry is also very common in Europe. Paris in particular –
which had historically relied on an arsenal system – put a premium on the creation and maintenance
of an autonomous, technologically advanced A&D industrial base and ultimately viewed it as the
best guarantee to defend France’s power position and interests in the world. Against this backdrop,
French and German governments have been fighting regularly over the exact distribution of EADS /
Airbus top management positions along national lines. This state of affairs is even more surprising
given the fact that Berlin has no equity stake in EADS. However, in order to push back against
Paris and to prevent a potential sell-out of Germany’s A&D base to the French, the German
government has repeatedly felt it necessary to get directly involved in strategic decisions or crucial
top-level personnel choices. While France has been “gradually moving away from the traditional
model of protecting state interests through total government ownership and control and toward a
private ownership-based model that allows foreign investment even in firms with sensitive
capabilities” 59 , there is simply “no evidence the French government intends at this time to fully
60 61
divest its shareholdings in defence firms or [more importantly] eliminate its Golden Shares”.
“The boundaries between industrial corporations and the state are not easily drawn in
aerospace. […] those in high political office are wont to regard the aircraft industry and its
products as symbols of national prowess. As a consequence, industrial competition is all too
often transmuted into deeper conflicts between states over what they deem their rightful
political and economic territories. […]
While aircraft industries retain strong national affiliations, international collaboration has
nevertheless become normal practice in airframe and aero-engine research and
development and production. […] Intense competition is, paradoxically, giving rise to
increasingly extensive and intricate patterns of collaboration, with firms that are working
together in one area frequently competing in others.
[…] Hayward has understandably chosen in the face of such complexity to concentrate on
the civil industry. Yet military production is a more extensive activity for most of the firms in
this industry, and it is ultimately the factor that ensures its special status. We must now hope
that he will turn his attention to the military sector, and help us overcome our present
58 (Zakheim & Kadish, 2008)
59 Bialos (2009) vol. II, p. 345
60 Ibid., p. 347
61 French government interference also extends to non-strategic firms like Renault. (Hall & Tait, 2010)
27

ignorance of the relationship between civil and military activities in this important
industry.” 62
Due to the aerospace industry’s strategic importance, the basic principles of the West’s post-WWII
international economic order – based on the free flow of goods, services, and money across borders
– never fully applied to that industry sector. For instance, governments have generally imposed
unique accounting and security restrictions on both private and state-owned aerospace companies.
Furthermore, governments tightly regulate arms exports, technology transfers, and foreign direct
investment in this strategic industry sector. 63 Even within the EU, the aerospace industry has been
shielded from the competitive dynamics of the Common Market. 64 Until the end of the 20 th century,
this national security logic also extended to the airline industry, where the protection of state-
controlled national carriers through the distribution of exclusive landing rights has long been
commonplace. Apart from access restrictions, many countries have stringent rules limiting foreign
ownership of their national airlines. Washington, for instance, has limited foreign non-voting equity
stakes in US airlines to a total of 49 percent while the total voting rights of foreigners must not
exceed 25 percent. In the US, these ownership restrictions are justified in terms of national security
as most US commercial airlines are part of the DoD-controlled Civil Reserve Air Fleet (CRAF). 65
In the military domain, national governments are usually the main customer of their respective
national aerospace companies. This monopsonic market power has given governments
extraordinary leverage over “their” aerospace companies, including a key role in defining the
requirements for military products. Furthermore, given the capital intensity of advanced weapons
technologies, national governments usually support the research and development of new military
systems. As a result of these barriers, the aerospace industry has typically been insulated from the
commercial pressures and disciplines of “normal” businesses. In Europe in particular, governments
at times even seized direct control of parts of their national A&D industrial base. In this context,
governments can leverage monopsonic market powers to determine the structure, conduct and
performance of their A&D industry. The government’s overall objective – especially during high-
threat / high-risk periods like the Cold War – is clear: to retain a certain degree of national autarky
and autonomy in arms development and production to safeguard the country’s vital security
interests and to protect their technological innovation. In the US, in particular, the close,
62 Walker (1987)
63 Hayward (2000) pp. 115-132
64 “[A]ny Member State may take such measures as it considers necessary for the protection of the essential interests of
its security which are connected with the production or of the trade in arms, munitions and war material […].” Art. 296
(ex Art. 223), EC Treaty.
65 CRS (2006)
28

interdependent relationship between the government (Congress, the Pentagon, etc.) and the A&D
industry also fostered the emergence of what President Eisenhower dubbed the “Military-Industrial
Complex” (MIC): 66 politically powerful lobbies that mix corporate and state interests by leveraging
the flow of multi-billion dollar procurement contracts for their own, narrow commercial and
political gain. In particular, Eisenhower warned his fellow countrymen that they should “guard
against the acquisition of undue influence, whether sought or unsought, by the military-industrial
complex”, something which could potentially put it beyond the reach of effective democratic
political control.
Historically, the rise of the aerospace industry is inextricably intertwined with WWI and WWII.
The two wars – especially WWII – provided a major boost to the aerospace industry as
governments on both sides of the conflict rushed to build up and strengthen their respective
aerospace industrial base. In WWI, planes were used primarily for reconnaissance purposes as their
offensive capabilities were still rather limited. In WWII, in contrast, aircraft performed a wide range
of tactical and strategic operations, including as bombers, fighters, close air support / ground-attack
aircraft, transport and reconnaissance planes, etc. In addition, WWII also saw the introduction of
revolutionary technologies like missiles and nuclear weapons – virtually all of which were
developed in government-sponsored research establishments which employed tens of thousands of
scientist to work on weapons that might provide crucial military advantages over the enemy.
Policymakers were quick to draw the lessons from the two world wars and recognised the crucial
importance of maintaining technological superiority in military and civilian affairs in ensuring
one’s own national security and survival. Nuclear warheads and missiles would subsequently
become the basis for Cold War strategic deterrence. For a long time – that is, from the industry’s
inception during WWI until the 1970s / 1980s – the defence sector served as the aerospace
industry’s technology driver and delivered important spin-off benefits for commercial aircraft
applications as well as other industry sectors: 67
“Historically, civil aeronautics development was triggered by military advancements, which
the civil industry could refine or improve to gain the efficiency or technical objectives
66 Eisenhower (1961)
67 The aerospace industry in general has long been regarded as a technology leader that generates valuable spin-offs for
other industries. For example, innovative composite materials from aerospace manufacturing – initially designed to save
weight and thus fuel costs – have found their way into the automotive industry, rapid transit vehicles, boats, and even
sporting equipment. In the aerospace business, the introduction of innovative light-weight composite materials promises
significant benefits for defence and commercial products alike as “The design of stronger, lighter, and more fuelefficient
aircraft is a common goal of both sectors.” ITC (2001) ch. 7-6
29

equired in civilian application – for example the swept-wing, fly-by-wire controls, and
retractable landing gear.” 68
“During the Cold War period, the drive to achieve numerical and tactical superiority in
aircraft and missile technology prompted governments to spend lavishly on R&D for
military aircraft that resulted in spill-over benefits for civil aircraft […].” 69
However, as the centre of technology leadership in important areas like computers,
communications, composite materials, etc. began to shift from government-sponsored entities to the
private sector, the flow of net benefits from the military sector to the civil sector “diminished and
possibly reversed in recent years” 70 . 71
“In more recent years, a reverse situation has become common, with the results of civil
research or component design subsequently being used for military purposes, e.g., improved
fuel efficiency, maintainability and reliability of jet engines, super-aluminium alloys, flight
management systems and flight structures.” 72
“There has been a major shift towards military use of technology driven by civilian
research and development [R&D], particularly in electronics. Also, the success of civilian
technology production has fostered the move away from a particular military culture of
73 74
technology generation.”
In the late 1980s / 1990s, the growing evidence of “gold-plating” in the defence sector as well as the
discovery that commercial-grade Japanese semiconductors were far cheaper and had almost the
same performance characteristics as US military semiconductors played an important role in
transforming outdated traditional perceptions regarding the flow of innovation between the military
and civilian sectors. “The Decision to broaden commercially – and thus internationally – DoD’s
supporting industrial base, made in earnest during the 1990s, was both conscious and necessary.” 75
68
National Academy of Engineering (1985) p. 101
69
ITC (2001) ch. 7-6
70
Ibid., ch. 7-5
71
“Commercial R&D began outpacing defence R&D in the 1970s. Some studies have concluded that the private
sector’s sophistication and rates of progress have exceeded the government and defence industry, and that commercial
R&D is making militarily useful technology available to allies and adversaries, thereby narrowing the equipment
advantages long enjoyed by the US military. Moreover, many believe that the costs of developing new technologies
within the defence industrial base have grown over the years at a much more rapid pace than the government’s or
companies’ investment rates. Consequently, even in the face of continued spending on R&D, both the US government
and its defence industry have had to reduce the number of new projects in which they invest. The net impact is that the
scope of the government’s pursuit of, and leadership in, technology has declined.” Watts (2008) pp. 55-56
72
National Academy of Engineering (1985) p. 101
73
Brzoska (2007) p. 1
74
“There also has been something of a shift toward reliance, where possible, on commercial standards, solutions, and
components – although the shift is by no means consistent and varies from one product market to another.” Bialos
(2009) vol. I, p. 44
75
Defense Science Board (1999) p. 8
30

The increasing importance of technologies originating in the commercial sector is also illustrated by
stepped-up efforts to control the export / proliferation of dual-use goods which have both civilian
and military applications. 76 Foreign collection efforts targeted at the US cleared defence industry
have increased sharply in recent years, primarily “because our organisations research, develop, and
manufacture advanced dual-use (commercial and military) technologies and products” 77 .
Information systems are by far the most targeted technology. Experts estimate that world-wide
expenditures on military R&D totalled US$85 billion in 2004; 60 percent of which was spent by the
US government alone. 78 In contrast, total global spending on defence and civilian R&D amounted
to about US$850 billion that same year – putting the ratio between military and commercial R&D at
1 to 10. In the US, the share of military R&D is significantly higher and amounts to about 17
percent. 79 During 1996-2004, total US military R&D spending increased from US$44.7 billion to
US$54.1 billion annually while the combined figure for the UK, France, and Germany dropped
from US$10.4 billion to US$7.9 billion. However, there is no consensus that the commercial sector
has become the (aerospace) industry’s ultimate technology driver:
“Proponents of the viewpoint that the net flow of R&D benefits continues to be from the
military to the civil sector argue that the military sector has always been and will continue
to be more innovative and willing to take risks on new technologies. This innovative drive is
fuelled by the desire to maintain technological superiority over other countries. This group
also points out that the greater demands on military aircraft in terms of speed,
manoeuvrability, and survivability will ensure that technological breakthroughs will first be
achieved by the military sector.” 80
The US A&D industry constitutes the backbone of the country’s impressive global military
dominance. Boasting virtually unrivalled technological superiority, a vast fleet of American fighter
planes and bombers, aircraft carriers, helicopters, missiles, spacecraft and satellites enable the US to
project its military power around the world and gather unprecedented amounts of intelligence on
foes and friends alike. The A&D industry is also a key element of the Pentagon’s transformation 81
76
“Over the past half century, knowledge of advanced weapon technologies has proliferated around the globe and
become more widely accessible to small states and even non-state groups. No longer are the nations of the developed
West and the former Soviet Union in a position to dominate R&D or maintain effective control over the more important
military technologies and capabilities.” Watts (2008) p. 64
77
US Defence Security Service Counterintelligence Office (2006) p. 1
78
Watts (2008) p. 4
79
The figures for the UK, France, and Germany are 10, 9, and 2 percent, respectively. Ibid., p. 5
80 ITC (2001) ch. 7-6
81 DoD (2003)
31

82 designed to move from “an industrial age to an information age military” with fundamentally
joint, network-centric, distributed forces capable of rapid decision superiority and massed effects
across the battle-space. 83 Industrial-age warfare in WWI and WWII was characterised by large-
scale battles. Achieving quantitative superiority by out-producing the enemy in terms of tanks,
ships, planes, bombers, etc. was key to victory. In contrast, victory in information-age wars is
dependent on the combination of superior intelligence / reconnaissance information and the timely
projection of accurate, massive firepower. 84 Information-age warfare leverages aerospace
technology to first gather intelligence (through satellites, etc.) and then strike from a “safe”
distance. 85
Kosovo may well be the first war won through air power only. 86 In Afghanistan, America
maximised the accuracy of its air strikes by inserting special forces with Afghan militias to allow
for the targeted, laser-guided destruction of enemy forces. In Iraq, the Pentagon launched massive
aerial bombardments followed by armoured Blitzkrieg operations. However, while airpower played
a crucial role in the overthrow of Saddam Hussein and the Taliban, subsequent counterinsurgency
operations in Iraq and Afghanistan demonstrate the importance of having “boots on the ground” to
stabilize a country after the high tech / high-intensity fighting is over. The future role of airpower in
(US) military strategy continues to be the subject of heated debate. 87 Proponents of air power will
also need to show how it can effectively contribute to the fight against terrorists and WMD 88
proliferation.
82 RMA (Revolution in Military Affairs) is “a paradigm shift in the nature and conduct of military operations which
either renders obsolete or irrelevant one or more core competencies in a dominant player, or creates one or more new
core competencies in some dimension of warfare, or both”. Hundley (1999) p. xiii
83 DoD (2003) pp. 9-11
84 “Arguably the most important single proposition influencing contemporary American strategic thought in both
official and unofficial circles is the identification of information as the key factor in military operations”. Freedman
(2006) pp. 16-17
85 The political vulnerability of Western leaders to troop casualties coupled with clear Western air superiority have
created the “temptation of air power” as a “virtually risk-free military option”. Freedman (2006) pp. 61-65
86 During the 1991 Gulf War only 10 percent of the bombs used in the US-led coalition air campaign were precisionguided
weapons; during the 1999 Kosovo War 90 percent of the bombs were guided by laser or GPS satellites. See
(Byman & Waxman, 2000) for a more cautious and nuanced assessment of airpower’s role during the Kosovo War.
87 “The US would not be the first apparently unbeatable military power to find itself undone by an inability to take
seriously or even to comprehend enemies that rely on their ability to emerge out of the shadows of civil society,
preferring minor skirmish to major battle, accepting no possibility for decisive victory but instead aiming to unsettle,
harass, demoralise, humiliate and eventually to wear down their opponents”. Freedman (2006) pp. 5-6
88 WMD = Weapons of Mass Destruction
32

1.3 The consolidation of the US and European aerospace industries after the end of the Cold War
The end of the Cold War posed particular challenges for the A&D industry, especially since “the
long duration and special requirements of the Cold War [had] created a large group of highly
specialised private and public establishments with limited exposure to non-defence markets.” 89
With the Soviet threat gone, Western governments cashed in the “peace dividend” and embarked on
an extended “procurement holiday” (see Annex Table 4). 90 At the same time, the emerging RMA
led to a dramatic increase in military R&D costs for new weapons systems. Skyrocketing R&D
expenses, combined with a sharp reduction in the number of produced weapons systems, caused a
massive increase in the unit cost of advanced military aircraft – further accelerating a trend that had
begun decades earlier. 91 As a result, US and European A&D companies faced tremendous pressure
to consolidate and reap economies of scale. Streamlining, rationalisation, and consolidation were
the buzzwords. To put it simply, governments were aiming to get “more bang for the buck” while
defence companies were looking for economies of scale and scope as well as increased operational
efficiency.
While the Bush administration (1989-1993) rejected government intervention to foster industry
consolidation, the Clinton administration decided to reverse this policy and allowed A&D
companies to include the M&A restructuring costs (plant modifications, equipment relocation,
severance pay, retraining, etc.) in the reimbursable part of their cost-plus contracts – provided that
the consolidation process resulted in long-term net procurement savings for the Pentagon. 92
Between 1990 and 2002, the number of major contractors in the US A&D industry came down
from about 18 to four prime contractors, the so-called mega-primes: Boeing, LMC, Raytheon, and
Northrop Grumman Corporation (NGC). Due to the sheer size of the US defence market, by far the
largest in the world, and serious concerns about potential leaks and illegal technology transfers to
foreign companies 93 , the rationalisation and consolidation in the American defence sector involved
virtually no partners from abroad. According to Dr. Hamre, protectionist security hawks in
Congress and at DoS 94 would certainly have blocked such a move on national security grounds and
did push for ethnocentric consolidation instead. 95
89
Oden (1999) pp. 74-105
90
Annual US defence procurement spending fell from US$150 billion in the mid-1980s to US$50 billion in 2001.
91
Since 1945, the real unit costs of combat aircraft built for the RAF increased at a compound annual growth rate of
11.5 percent. Kirkpatrick (1995)
92
Korb (1996); (Gholz & Sapolsky, 1999/2000)
93
The diffusion of military technology from the hegemonic core to the periphery, combined with the pitfalls of
“military overstretch”, has played a key role in bringing about the decline of empires throughout history.
94
DoS = Department of State
95 Hamre (2007)
33

However, the massive consolidation of the US A&D industry through “pure play” mergers –
leading to the formation of a few giant, defence-heavy companies – also caused major concerns;
especially among those in charge of the Pentagon’s procurement budget. In 1997, the Clinton
administration abandoned its initial pro-merger policy in an effort to maintain a certain degree of
competition and to prevent the creation of harmful monopolies. The potential shift of market power
from buyers (governments) to sellers (A&D companies) is a major public policy risk associated
with large-scale industry consolidation leading to the creation of duo- or monopolies. There is a
danger that “the West could end up with a small set of very large, very powerful, and not very
competitive defence firms, favouring the maintenance of Cold War thinking and technologies.” 96
The key issue is how the gains from industry consolidation are divided between taxpayers (in terms
of cheaper, more capable weapons systems) and shareholders (in terms of corporate profits).
In Europe, defence budgets shrank even more dramatically after the end of the Cold War than in the
US. National governments and their respective A&D companies were reluctantly sacrificing
national autonomy in favour of increased European integration and interdependence in arms R&DP.
A major breakthrough came in October 1999 with the creation of EADS as the largest aerospace
firm in Europe. All three EADS founders (AM 97 , DASA 98 , CASA 99 ) were part of Airbus and had
thus gained valuable experience in collaborating successfully across different languages, business
cultures, and regulatory frameworks. 100 101 Prior to the EADS merger, the acquisition of GEC-
Marconi by BAe 102 – both privately owned, UK-based companies – in 1999 had led to the creation
of BAE Systems (BAE). 103 Due to the US-UK “special relationship”, BAE is the only European
firm with significant exposure and access to the lucrative American defence market. 104 105 In
essence, the “special relationship” refers to the fact that “The [UK] and the [US] are each other’s
106 107 108 109
closest ally and security partner”.
96 (Markusen & Costigan, 1999) p. 29
97 AM = Aérospatiale-Matra
98 DASA = Daimler-Benz Aerospace AG / DaimlerChrysler Aerospace AG
99 CASA = Construcciones Aeronáuticas SA
100 Airbus was initially organised as a GIE – a construct under French law that allowed all four partner companies to
retain their full legal, financial, and managerial independence. The profits from Airbus were allocated to each
participating company according to its stake in the consortium. In July 2001, the GIE was transformed into Airbus
Integrated Company.
101 Following the decision by BAE to sell its 20-percent stake in Airbus in October 2006, EADS now owns 100 percent
of Airbus, which accounts for more than two-thirds of the company’s revenues and an even higher share of its profits.
102 BAe = British Aerospace
103 BAE derives three-quarters of its turnover from defence and counts the US as the most important market.
104 BAE is the biggest non-US subcontractor for LMC’s JSF.
105 In 2007, BAE ranked as the sixth-largest Pentagon contractor.
106 “The US-UK special relationship today has a political and ideological superstructure and an embedded military and
intelligence substructure. […] Defence cooperation was at the heart of the special relationship from the outset, and
remains central to it.” (Wallace & Phillips, 2009) pp. 263 ; 267
107 (Chao & Niblett, 2006) p. 4
34

“A cursory look across four facets of this [US-UK] relationship shows that in three
dimensions, at least – commitment to the Atlantic political-military alliance, nuclear
cooperation 110 , and intelligence sharing – a strong case can be made for the emergence of a
distinct and privileged bilateral partnership over the past forty years. The fourth area –
defence industrial cooperation – reflects a more ambiguous situation […].” 111
Chapter 7 discusses in more detail why – the long-standing US-UK “special relationship” and
BAE’s privileged access to the American defence market notwithstanding – Washington continues
to maintain political and institutional barriers preventing even closer US-UK defence industrial
cooperation; chief among them cumbersome US export licensing procedures imposing restrictions
on the transfer of sensitive technologies and / or on the sharing of relevant R&D results across the
Atlantic. In sum, however, it is nonetheless correct to point out that UK A&D companies like BAE
generally enjoy a much higher degree of trust and confidence among Washington’s key political
players than their competitors from other European countries. US political and military leaders
widely regard the UK as a loyal and trustworthy ally with whom they share not only a common
language and values but also a long history of wars fought side-by-side (including, most recently,
the controversial 2003 Iraq War).
In contrast, France has generally been viewed with much more scepticism by Washington and is
suspected of wanting to undermine America’s dominant leadership position – both within NATO
and on the global stage in general. 112 France’s long-standing aspiration to be a great power in a
multi-polar world order built on strong multilateral institutions (notably the UNSC, where Paris
wields a veto) has been particularly troubling for US policymakers. 113 During the Cold War, France
108 “After Suez, the British resolved never to get out of step with US foreign policy again. This was the point at which
British governments began to be obsessed with the idea of a special relationship. It was apparent that the UK could not
expect to play a major role in the world either independently of or in opposition to the [US]. Its future strategy would be
to trade loyalty for privileged access to Washington’s foreign-policy making.” Freedman (June 2006) p. 61
109 The 1956 Suez conflict marked the last time that London and Washington adopted openly antagonistic positions
during a major international security crisis (Britain’s refusal to commit combat troops to Vietnam is different in the
sense that London did not actively work against US interests; it simply failed to support the US). Drawing the painful
“Lessons of Suez”, the UK accepted its fall from great power status and decided to closely align its security and defence
policy with Washington.
110 “The UK’s nuclear deterrent has been developed and maintained in close cooperation with the [US] through the
creation of a trusted community of American and British scientists, engineers, officials, company executives, and
firms”. (Chao & Niblett, 2006) p. 12
111 Ibid., p. 11
112 France and Germany are the two major European countries that opposed the Bush administration over Iraq. In April
2003, France, Germany, Belgium, and Luxembourg called for the creation of a separate command headquarters for EUled
military operations. However, this “praline summit” initiative was quickly blocked by the UK and other Atlanticist
EU members for fear that it would undermine NATO.
113 “1. France considers itself a pivotal great power. 2. France can only play this pivotal role in a multi-polar world. 3.
France considers a multipolar world the best guarantee of international relations that are based on a multilateral
approach. France favours a strong role for international fora, especially for the Security Council of the UN, of which it
35

charted its own foreign and security policy, engaged in the 1956 Suez adventure, established its
independent “force de frappe” nuclear deterrent (ironically with US technological support) and
pulled out of NATO’s Integrated Military Structure (IMS) in 1966. 114 In the post-Cold War era,
French President Chirac became not only the chief proponent of the EU’s autonomous ESDP; he
also seized on the controversial 2003 Iraq War to forge a Paris-Berlin-Moscow-Beijing coalition in
an effort to counter the perceived unilateral exercise of American military power and Washington’s
blatant disregard for international law, including the primacy of the UNSC. 115 Apart from
geopolitical rivalries between Paris and Washington, Franco-American / transatlantic A&D
industrial collaboration has also been hampered by different approaches to export controls, raising
US concerns that American state-of-the-art defence / dual-use technologies shared with France or
other mainlined European countries could ultimately find their way to US adversaries around the
world. 116 Ultimately, mutual trust and a perceived congruence of foreign and security policy
objectives as well as the strategies to achieve them are they key reasons why America’s defence
industrial collaboration with the UK is so much closer than with any other European country.
Before the creation of EADS and BAE Systems, DASA and BAe had been in advanced
negotiations about a potential merger. For DASA, the option to join forces with BAe – also
privately owned – was much more attractive than to merge with AM, a company controlled and
partly owned by the French state. It is important to emphasise France’s state-centred A&D
industrial structure and management strategy. A 1992 report commissioned by the US Congress put
it bluntly:
“Nearly four-fifths of the French defence industry is owned directly or indirectly by the
state, either in the form of government-owned and operated arsenals, nationalised
companies […] or firms in which the government owns a large share of the stock […]. 117
The DGA (Délégation Générale pour l’Armement) has long served as the French government’s
main vehicle to shape and structure the country’s defence industrial base. 118 As a centralised
is a permanent member. Such a role will not only strengthen international law, but also confirm France’s great power
status.” van Herpen (2003)
114
“In France there exists a certain nostalgia for the Cold War era. In this period the world was not ideal, because not
multi-polar, but its bipolarity offered (Gaullist) France a relative independence vis-à-vis both superpowers.” Ibid.
115
The 2007 election of President Sarkozy dramatically improved French-American relations as exemplified by
France’s reintegration into NATO’s IMS in 2009.
116
For example, during the Iran-Iraq War (1980-1988), France alone accounted for about 20 percent of Saddam
Hussein’s major weapon systems imports. While these strategically-motivated arms exports were authorised by the
highest political authorities in Paris, they subsequently came back to haunt France (and its Western allies such as the
US) in the 1991 Gulf War over Kuwait. During “Operation Desert Storm”, France’s Mirage fighter jets had to stay out
of combat because of concerns that they might be confused with Iraq’s French-built Mirage fighters. OTA (1992)
117
Ibid.
36

procurement agency within the Ministry of Defence (MoD), “The DGA is the linchpin of the
French arms-procurement system, mediating among the political authorities, the defence industry,
and the military operators”. As one analyst put it, the DGA’s primary mission is “the preservation
and promotion of an ever-modernising arms industry within an internationally competitive French
industrial system”. 119 “While DGA officials do not intervene in day-to-day company operations,
they must concur in major strategic decisions such as large investments, new ventures, or
international collaborative programs.” The DGA director “has greater control over research,
engineering, and industrial matters than any other European or American defence officials”. 120
Other European governments, especially in the UK and Germany, were much more hesitant and
reluctant to adopt such an interventionist approach towards their A&D industry players. DASA
managers thus feared that the French government would use its considerable political leverage to
unduly influence the corporate strategy of the new, merged Franco-German company – making the
hoped-for rationalisation and consolidation of production sites as well as related potential job cuts
very difficult to implement. As subsequent Franco-German clashes among the top EADS leadership
have demonstrated, these fears were not unfounded. Furthermore, DASA reasoned that a merger
with BAe would make it easier to enter the lucrative US defence market.
It is important to note that EADS and BAE were created after most of the consolidation in the US
A&D industry – notably the BMD merger – had already taken place. Faced with increasing
competition from American mega-primes, European A&D companies had virtually no choice but to
co-operate more closely to reap economies of scale. This dramatic post-Cold War shift towards
more European transnational A&D industrial collaboration – notably in the form of the EADS
merger – was particularly hard to stomach for the French government, which had long put a
premium on largely state controlled defence companies achieving national autonomy across the full
range of armaments. For sure, Paris had decided to pursue collaborative defence industrial programs
with its European neighbours from the 1960s to the 1980s 121 ; but virtually all of these programmes
were bilateral in nature because they offered “greater control and lower transaction costs” 122
compared to bigger, multi-national consortia.
118
“De Gaulle’s political goal of achieving national autonomy in the full range of armaments – particularly nuclear
weapons – in the face of tight budgetary constraints required the careful husbanding and allocation of resources. To this
end, in 1961 de Gaulle replaced the weapons directorates reporting to the individual services with a centralised
procurement agency known as [DGA].” Ibid., p. 11. This report provides also an excellent overview of the DGA’s
structure and functioning.
119
Kolodziej (1987) p. 258
120
OTA (1989) p. 11
121
Franco-British arms programs included both helicopters (Puma, Gazelle, Lynx) and attack aircraft (Jaguar); Franco-
German defence projects included the Transall and the Alpha Jet. OTA (1992) p. 27
122
Ibid., p. 27
37

“But Gaullist imperatives caused France to collaborate mainly on systems of secondary
military importance, such as helicopters, trainers, and transport aircraft, while preserving
national autonomy in “strategic” areas such as nuclear weapons, nuclear-capable delivery
systems, and high-performance combat aircraft.” 123
In sum, the EADS merger was significant for the French in several respects. First, it weakened the
government’s control over the A&D industry; second, the EADS merger was multilateral in nature;
and third, the EADS merger also covered strategic areas such as high-performance combat
124 125 126
aircraft.
123 Ibid., pp. 27-28
124 The EADS merger excluded France’s military nuclear activities.
125 “The DGA has concluded that France no longer has the financial means to maintain an independent capability across
the full spectrum of weapon systems and must increasingly rationalise defence production on a European scale, while
concentrating on its competitive strengths.” Ibid., p. 20
126 “DGA officials have promoted international collaborative programs as a strategy for countering the monopolistic
practices of national-champion firms.” Ibid., p. 15
38

1.4 International collaboration and governmental intervention in the aerospace industry
In principle, international collaboration in armaments production is only a second-best solution. 127
“As a policy instrument, collaboration seeks to resolve the underlying tension between nationalistic
conceptions of security and the globalisation of advanced industries.” 128 For national security
reasons, states would generally prefer complete national autonomy in armaments research,
development, and production. In an “ideal” world this would be the “best” solution. However, due
to limited financial and technological resources, many states decide to collaborate, notably to cope
with skyrocketing R&DP costs for advanced weapons systems. States have basically four options to
acquire weapons and advanced aerospace systems. 129 First, states with sufficient financial and
technological resources will generally opt for “autonomous armament production”. Second, states
that are technologically advanced but lack the financial resources to develop weapons systems on
their own opt for “co-development”; an arrangement where two or more states share in all aspects
of the development and production of a weapons project. Third, states that have sufficient financial
assets but lack the necessary technological know-how will opt for “co-production”, where they
assemble foreign weapons under licensing agreements. Finally, the least desirable political option is
the “import” of weapons systems from abroad. While this last strategy is often the “cheapest”, in
purely financial terms, states that import weapons could become dependent on suppliers abroad for
their national security. All things being equal, the (military) acquisition preferences of states can
therefore be ranked as follows: autonomy > co-development > co-production > import.
Historically, there exist important differences in the developmental trajectories of the European and
American aircraft industries. In Europe, small, captive markets and the associated high degrees of
national fragmentation made it quite difficult to reap economies of scale across different companies
and national boundaries. European aircraft makers forged close links with their respective national
home governments early on, especially after the outbreak of WWI. Some aircraft makers were even
either partially or fully nationalised to better support their countries’ respective war efforts. 130 In the
US, in contrast, all aircraft companies have remained in private hands since the industry’s inception
more than a hundred years ago. 131 132 That being said, Washington played an important role in
127
Kapstein (1991-1992) pp. 657-675
128
Ibid., p. 658
129
Ibid., pp. 658-661
130
Despite the fragmentation of Europe’s aeronautics industry, “transnational production strategies were not uncommon
before the war” and “The ‘Golden Age of Aviation’ (1927-1932) was marked by widespread use of licensed production
of foreign aircraft”. Golich (1992) p. 910
131
Washington has repeatedly given loan guarantees and favourable anti-trust review treatment to military aerospace
manufacturers threatened by bankruptcy (i.e., Douglas Aircraft and its subsequent “shotgun wedding” to McDonnell in
the mid-1960s and the rescue of Lockheed in 1971). (Moran & Mowery, 1991) p. 137
132
While the US defence sector is, in principle, fully privatized, it is important to point out that there exist a number of
so-called GOCOs (government-owned and contractor-operated facilities) and even GOGOs (government-owned and
39

promoting the development of the US civil aviation industry, for example through the creation of a
transcontinental airmail service supported by a network of rotating beacons (“lighted airways”)
designed for night flight navigation in 1924 and by establishing the Civil Aviation Authority in
1938, with responsibility for “direct subsidies to promote passenger travel, economic regulation of
airlines, air traffic control, and safety” 133 . In sum, a crucial factor in explaining the global
dominance of the US aviation industry after WWII has been “a productive, decades-long
relationship among the government, the major airlines, and the aircraft manufacturers in the context
134 135
of a free-market economy” dating back as early as WWI.
In the wake of WWII, much of Europe’s once impressive aerospace industrial base was left
severely weakened. US aerospace companies, in contrast, suffered no devastation as a result of
WWII and were thus able to increase both the production and technological sophistication of their
airplanes during the post-war period. 136 137 After the Berlin crisis of 1947-1948, as the Cold War
consolidated into a long-term confrontation, the US government provided its Western European
allies with defence and aerospace equipment in an effort to help build a credible conventional
deterrent vis-à-vis the growing Soviet military threat. Initially, most of the US matériel was given
to Europe for free. In contrast, American military assistance programmes launched in the early
1950s were part of the “Cold War” rearmament effort and thus generally tied to the sale (and later
extensive co-production) of US military aircraft such as the F-104 to European countries such as
Germany. In the 1950s and 1960s, America also sold civil aviation aircraft at steep discounts to
airlines in friendly countries. While this strategy contributed to the emergence of a burgeoning
airline industry in many parts of the world, it also made these foreign airlines “path dependent” on
government-operated factories) for the production of military products. The GOCO structure is primarily used for the
manufacturing of sophisticated ammunitions in an effort to protect private contractors from potential lawsuits and
liability claims related to the adverse environmental impact of their operations. Current GOCO examples include the
Holston Army Ammunition Plant located in Kingsport Tennessee, which remains the primary source of military
explosives in the United States. Since 1999, BAE Systems (through its Royal Ordnance subsidiary) has been the private
contractor operating this particular GOCO.
133 National Academy of Engineering (1985) p. 27
134 Ibid., p. 26
135 1934 also saw “the separation of airlines from manufacturers by government fiat to increase competition and
industry development”. Ibid., p. 27
136 “In 1943, the [UK] had agreed with the [US] that the former would concentrate on developing and manufacturing
fighter aircraft while the latter would specialise in heavy bombers and military transports. The resulting division of
labour placed Britain at a commercial disadvantage after the war, for the American wartime experience was more
relevant to peacetime industrial requirements than that of the British.” Grieco (1979) p. 519
137 After WWII, the Allies moved quickly to snatch Germany’s top aerospace talents like Werner von Braun and make
them work on their own national defence programs, thus leading to a significant German / European “brain drain”. The
US Office of Strategic Services, the predecessor to the CIA, brought hundreds of German military scientists to America
as part of clandestine “Operation Paperclip”. These scientists would subsequently make crucial contributions to US
space missions, including the Saturn rockets and the Apollo programmes.
40

US aerospace companies. 138 As a result of this US export promotion policy and the related path
dependency of many airlines, American aerospace companies held around 80 percent of the world
139 140
market for civil aircraft by 1970.
To counter America’s dominance of the civil aircraft market, three European aerospace companies
from Germany, France and the UK – politically and financially supported by their national
governments – launched the Airbus consortium on 20 July 1967. “Airbus must be seen as an
international collaboration that arises out of the failure of European states to develop successful
strategies to compete with the [US].” 141 142 The Airbus project thus reflected Europe’s
determination “to resist and match American technological ‘imperialism’”. 143 For Airbus, the only
feasible way to enter the rapidly growing commercial aviation market and break the existing US
monopoly was to develop a new type of large passenger aircraft. Previous British and French efforts
to market their own jet airliners (Comet, Caravelle) had failed. However, the driving forces behind
Airbus were not only economic or technological considerations. Airbus was also a European
political project designed to support Europe’s historic integration process towards “an ever closer
144 145
union”.
Drawing costly lessons from their previous failures, European governments gave the Airbus
partners considerable leeway to independently develop and execute their commercial two-pronged
strategy. First, Airbus set itself the goal to capture a significant part – at least 30 percent – of the
global market for large passenger aircraft above 100 seats. Second, to achieve this ambitious goal,
Airbus decided to build an entire “family” of similar aircraft to respond flexibly to the changing
needs of aerospace markets around the world. However, the first Airbus – christened A-300 since it
had room for 300 passengers – had difficulties taking off commercially after its maiden flight in
October 1972. On the economic front, the oil shock in 1973 pushed many Western economies into
recession and drove up the price of kerosene – the most important variable cost factor of any
138
It is expensive for airlines to switch from one aircraft manufacturer to another since pilots, crews, and technical
personnel have to be retrained, new maintenance equipment needs to be bought, etc.
139
McGuire (1999) p. 2
140
America remains the world’s most important civilian and military aerospace market. In the 1960s, US commercial
aircraft companies earned 90 percent of their revenues from the domestic market.
141
McGuire (1999) p. 26
142
“The aircraft industry is the clearest example of foreign targeting that adversely affect US firms. The [US] has
traditionally dominated the production of large commercial aircraft but has now been challenged by Airbus […]. The
key to the Airbus challenge is government financial support.” Krugman (1984) p. 116
143
Nau (1974) p. 12
144
McGuire (1999) p. 37
145
France’s decision to build the Rafale fighter aircraft, the nuclear-powered Charles de Gaulle aircraft carrier and the
Triomphant-class nuclear submarine underline the French governments’ clear commitment of political capital and
economic resources for the country’s national military industrial independence and grandeur. Kapstein (2002) p. 143
41

airline. 146 Despite the clear business focus of Airbus and the considerable operational independence
enjoyed by its partners, the consortium’s administrative structures revealed the close links between
European governments and their Airbus aerospace companies. For the definition of its political
orientations, for instance, Airbus reported to the so-called Intergovernmental Committee (IGC),
composed of representatives from the different ministries responsible for the Airbus project. The
IGC also provided the institutional link between the founding nations of Airbus and the European
Commission (EC), which plays a key role in transatlantic disputes over trade and industrial policy.
“Essentially Airbus represented a bargain struck between aerospace firms and governments.
Governments would back the consortium with money and political support. Airbus, for its part,
undertook to develop a commercially credible product.” 147 Airbus was founded as a public-private
partnership designed to preserve the independence and autonomy of the European aerospace
industry vis-à-vis the crushing dominance of the American competitors.
Between 1972 and 1977, US aerospace manufacturers continued to dominate the global commercial
aircraft market. In 1977, however, Airbus had a major strategic breakthrough and sold 23 A-300 to
its first American customer, Eastern Air Lines. On the political front, Congress and the Carter
administration exerted pressure to discourage American carriers from buying Airbus or any other
non-US aircraft for that matter. 148 149 Washington’s political leaders argued that US airlines should
“Buy American” in order to save jobs in the US aerospace industry. At one point, the Carter
administration even threatened to impose countervailing duties on all Airbus imported into the US
in an effort “to protect domestic manufacturers from foreign competition backed by government
finance”. 150 It is clear, though, that during the 1970s, both Boeing and MDC wanted to avoid a
transatlantic trade war and did not call on the US administration / Congress to impose import
restrictions or other trade remedies vis-à-vis Airbus. 151 152 As the 1970s progressed, however,
Airbus increasingly began to put its US rivals on the defensive. By 1979, the European consortium
146 “Airbus was also lucky in that fuel price increases of the mid-1970s made a large twin-engined airliner more
attractive when the A-300 was the only one available.” Hayward (1987-1988) p. 20
147 McGuire (1999) p. 39
148 Eastern Air Lines’s A-300 order and Pan Am’s purchase of the UK-manufactured TriStar 500/RB.211 triggered a
House hearing, and there was “little doubt in Washington that a major Congressional investigation would have resulted
if United Airlines had decided to buy $1,000 million-worth of Airbus A-300-10s instead of Boeing 767s” in 1978.
Flight International (1978)
149 In 1961, Mohawk Airlines purchased four British-made BAC 1-11 aircraft, and American Airlines ordered 15 such
aircraft in 1963, triggering a storm of protest from US aircraft makers and Congress.
150 Flight International (1978)
151 “The Carter administration was concerned about creeping subsidies in civil aviation, but no countervailing duties or
other retaliatory measures were imposed. Instead we negotiated an agreement, in the context of the OECD
[Organisation for Economic Co-operation and Development] Gentleman’s accord on export credits that brought some
discipline to aircraft financing. In the 1970s and 1980s, Boeing didn’t want to trigger a trade war, for lots of good
commercial reasons.” Hufbauer (2009).
152 “Since Boeing and [MDC] were profitable and export-dependent and had extensive overseas connections, both could
be expected to oppose any closure of the American market.” (Milner & Yoffie, 1989) p. 256
42

had managed to replace MDC as the world’s second-largest commercial aircraft manufacturer
153 154 155
behind Boeing.
In response to Airbus’ meteoric rise, Boeing and MDC started lobbying the US Congress and the
Carter administration to push for negotiations on a GATT 156 accord that would, inter alia, abolish
all R&D subsidies for commercial aircraft, the preferred mode of support in Europe. 157 158 In April
1979, after quite long and laborious negotiations, the US and European governments signed the
“GATT Aircraft Agreement” in Geneva. This accord contained three key provisions. 159 First, all
import tariffs on aerospace products would be completely abolished by 1 January 1980; second, all
participating governments agreed not to exert “unreasonable pressure” to influence the acquisition
policy of the airline companies; and third, the aerospace companies would have to sell their aircraft
at a price that takes into account all relevant R&D and production costs; in other words, this anti-
dumping clause made it illegal to sell aircraft at an artificially low price in an effort to squeeze out
competitors. However, the GATT Agreement did not ban direct financial support / “launch aid”
packages provided to Airbus by European governments. As a result, US-European tensions over the
aerospace industry continued to mount throughout the 1980s. 160
Today, as throughout the Cold War, America has still the most stringent military and dual-use
export controls in place. These constraints are due to the fact that the US government has a long
tradition of imposing rather complex and cumbersome unilateral technology export controls that go
beyond the limitations set by the respective multilateral regimes.
“[US] export control rules written during the Cold War have been extended, reflecting
unchanging and even growing concern within the policy bureaucracies about the risk of the
153
Airbus managed to boost its share of the world’s commercial aircraft market from 3 percent in the early 1970s to 30
percent in 1979. Ibid., p. 257
154
Lockheed pulled out of the commercial aircraft market in 1981 due to poor sales of its L-1011 TriStar planes amid
growing competition from Airbus. Martel (2000) p. 35
155
MDC did not only cross-subsidise the loss-making commercial aircraft unit through its profitable fighter business
but also benefited from Pentagon contracts for military transport planes (spin-off effects, etc.).
156
GATT = General Agreement on Tariffs and Trade
157
“By the 1980s, Boeing, in particular, made stronger and more complicated demands. […] The charges against
Airbus included its willingness to undersell at all costs and its use of political pressure to buy from Airbus.” (Milner &
Yoffie, 1989) p. 260
158
In America, in contrast, the aerospace manufacturers received huge R&D grants from the Pentagon to develop
military aircraft that also generated important positive spin-off effects for Boeing and MDC’s commercial aircraft
business. Boeing’s 707 commercial aircraft benefited tremendously from military spin-off effects: “A large share of the
technology developed for the engines and airframes of the long-range military bombers and tankers of the 1950s had
important commercial applications, helping to lay the foundation for the 707.” (Moran & Mowery, 1991) p. 136
159
McGuire (1999) pp. 68-90
160
In 1987, “Boeing threatened to file a Section 301 petition as well as anti-dumping and countervailing duties suits
against Airbus, noting that ‘under any of these laws, the US government could negotiate with Airbus to limit the
43

loss of technological superiority and the proliferation of capabilities that could be used, one
day, against the [US]. This concern is mirrored in the US Congress where issues relating to
defence technology exports and direct foreign investment by European firms in the US defence
industrial economy have been hotly debated.” 161
It has been argued that as a result, US high-tech companies have often been at a competitive
162 163
disadvantage compared to their foreign rivals from other Western and non-Western countries.
Matters are made worse by the extraterritorial reach of American export control provisions, which
extend to foreign subsidiaries of US companies, foreign companies using American technology,
etc. 164 However, the weight of US government support for American defence companies as well as
the vast size of the Pentagon’s (highly protected) military procurement market gives US companies
a major competitive advantage vis-à-vis foreign firms, thus counterbalancing any negative
economic impact due to strict defence export regulations. 165 Sales of US weapons systems are
buoyed by their technological sophistication and competitive pricing (due to superior economies of
scale) as well as Washington’s status as the world’s last remaining superpower, which provides
unique political and military levers to convince foreign governments to opt in favour of US-made
weapons. 166 Despite stringent export controls, America remains by far the world’s biggest arms
exporter. Therefore, demands from Washington that other countries exercise restraint and adhere to
stricter export controls are often viewed as protectionism bordering on hypocrisy:
quantity of exports, eliminate subsidies, impose taxes, or reach some other solutions’.” (Milner & Yoffie, 1989) p. 260.
Inserted quotations from Congressional testimony by a senior Boeing executive in June 1987.
161 CSIS (2003) p. 27
162 “[T]o the extent that [export] controls are interpreted / implemented unevenly, firms from countries with more liberal
policies enjoy a bonus of greater sales revenues and world market share, lower compliance costs, higher resources for
R&D, and hence continuing competitive advantages over their handicapped [US] rivals.” Parkhe (1992) p. 50
163 “Evidence shows that states routinely curtail capitalists’ global activities if these interfere with states’ other projects
or interests, despite capitalists’ complaints that government constraints cost them lucrative markets or stigmatise them
as unreliable trading partners. The US, for example, restricts Boeing’s missile sales to China, to comply with
international arms control treaties, protect Taiwan, and preserve the US traditional ‘hard’ geopolitical hegemony.”
Gritsch (2005) p. 14
164 US export control regulations apply “to US foreign subsidiaries and independent foreign companies selling USorigin
end products, US-origin parts and components incorporated in foreign equipment and even foreign products
manufactured with US-origin technology”. Parkhe (1992) p. 54
165 US defence export control regimes also have major holes, for example with regard to Israel, which has continued to
benefit from extensive transfer of advanced US military technologies despite a rather long history of violating US reexport
regulations vis-a-vis South Africa, China, and India.
166 The 1991 Gulf War highlighted the superiority of US military technology and demonstrated Washington’s role as a
guarantor of international security. “The superior performance of American weapons in the Gulf War positioned US
companies to win major new business from that and other regions. […] As the industrialised Western powers reduced
their procurement budgets, foreign business became a critical profit centre, even determining the survival of many
companies. The White House helped whenever it could. The Bush administration actively promoted and negotiated the
lion’s share of the [US]$83.1 billion in arms export agreements in the four years following 1990 (up from [US]$34.5
billion during the previous years). (Keller & Nolan, 1997-1998) pp. 116-117
44

“It is both morally and politically indefensible to tell other nations – such as China, France,
and Russia – to reduce arms sales when US officials and arms companies are conducting a
full-court press to dominate international markets.” 167
The US Arms Export Control Act (AECA) gives the President the statutory authority “to control the
export and import of defence articles and defence services.” 168 In practice, however, AECA
delegates the authority for the US export control system to the Secretary of State, who is
responsible for the “continuous supervision and general direction of sales, leases, financing,
cooperation projects and exports” of defence articles and services. 169 The DoS compiles a list of
military goods and services covered by the AECA, the so-called US Munitions List. The Commerce
Department, in turn, maintains the Commerce Control List covering dual-use items. In general, the
DoS, which runs the ITAR licensing procedure, has taken a conservative view of military export
licenses. The State Department has been particularly careful to guard against potentially risky
export of military items and related technology transfers to other countries. Any US company
intending to export a defence-related product or technology, or that wants to negotiate with a
foreign partner over an export deal, joint venture, merger or acquisition has to obtain a license from
the Office of Defence Trade Controls (ODTC). These strict, complex and lengthy export licensing
procedures have made it extremely difficult for aerospace companies in Europe and the US to co-
operate on major, state-of-the-art defence projects. 170
During the second Clinton administration, the Pentagon lobbied the DoS to ease US export controls
to facilitate international co-operation on the development and production of defence systems. In
February 2000, the Pentagon signed Declarations of Principles (DOPs) with the UK and Australia
to begin a dialogue on the potential harmonisation of the countries’ respective defence trade rules
and procedures. While the DoS initially resisted the Pentagon’s reform efforts, it launched the
Defence Trade Security Initiatives (DTSI) in May 2000. 171 The most important element of the
proposed reform process was to exempt those countries from the lengthy ITAR 172 process “that
167 Ibid., p. 124
168 AECA section 38
169 The DoD covers military technology exports, the DoS reviews arms shipments, the DoC is in charge of dual-use
exports, the DoE (Department of Energy) controls nuclear material exports, and the NSA (National Security Agency)
controls the export of encryption technologies. Parkhe (2003) p. 52
170 “[A] fundamental overlap of export license jurisdiction between the DoC […] and the DoS […] has resulted in
unclear and conflicting policies, long delays in reaching closure, and uncertain lines of authority.” Ibid., pp. 50-51
171 “The [DTSI] comprises 17 reforms […] designed to streamline the processing of munitions export licenses. The
initiatives include, amongst other things, granting [ITAR] exemptions for unclassified exports to certain foreign
governments and companies, and a range of flexible, new licensing vehicles for NATO member countries, Japan, and
Australia.” Pentagon: http://www.dsca.osd.mil/dtsi/DTSI_links.htm
172 ITAR = International Traffic in Arms Regulation
45

share with the [US] congruent and reciprocal policies in export controls, industrial security,
intelligence, law enforcement, and reciprocity in market access.” 173
Due to wide-spread US doubts about the effectiveness of Europe’s defence export and technology
transfer regimes, any attempt by European companies to make direct investments in the vast and
highly lucrative American defence market is generally viewed with a mix of suspicion and hostility.
The Committee on Foreign Investment in the United States (CFIUS) is the key institution to
evaluate the potential impact of any FDI on America’s national security posture. 174 In the aerospace
sector, the Pentagon normally takes the lead in investigating whether FDI / M&As involving an
American company could potentially undermine the country’s military-technological position by
creating new vulnerabilities and dependencies. CFIUS reviews involve an analysis of how the
planned transactions would affect the American aerospace industry’s ability to independently meet
the country’s national defence requirements. CFIUS can either be notified by any of the parties
involved in the planned transaction, or it may itself decide to review the FDI / M&A. Once CFIUS
has been notified, at least three Committee members must decide within 30 days that a formal
review of the case is warranted. If the answer is ‘yes’, CFIUS has another 45 days to review the
transaction and make a recommendation to the President on whether the operation should be cleared
or blocked. Finally, it is up to the President to decide within 15 days whether the transaction can go
ahead or not. While the vast majority of CFIUS decisions across the different industry sectors are
made rather quickly, large-scale (aerospace) M&As consume significant time and resources and
tend to attract unwanted political attention from members of the US Congress prone to lobbying by
interested third parties.
Finally, European aerospace companies generally face tough obstacles to selling their products on
the lucrative US defence market. The Pentagon’s acquisition policy favours American over
European / foreign companies, whose management, technology base, production facilities and
supply chains are at an elevated risk of potential political and economic pressure / interference by
foreign governments and companies. This ‘Fortress America’ approach is partly mirrored by a
‘Fortress Europe’ defence acquisition policy. However, European defence markets are generally
much more open to US companies than vice versa – not least because American A&D companies
can often deliver proven high technology products at more competitive prices and delivery dates
than their rivals from Europe and elsewhere. In addition, advanced arms sales do always have an
173 AECA section 38
174 CFIUS, formed in 1975, is chaired by the Treasury Secretary and includes the Secretaries of Defense, State and
Commerce, the Attorney General, the OMB Director, the USTR, the Chairman of the Council of Economic Advisers,
and several other government representatives.
46

important political dimension. Today, US defence experts fully recognise that America’s defence
export and technology controls are a double-edged sword, posing potentially fundamental
challenges to the long-term viability of the American defence industrial base. 175
175 “On the one hand, the US government would like to restrict the flow of militarily useful technologies and systems
from the [US] while, at the same time, limiting the dependence of the US military on overseas suppliers. On the other
hand, selling American systems and weapons overseas lowers their cost to the US taxpayer and spurs innovation, but
tends to create overseas competitors to US defence firms. Foreign sales can also be a subtle tool of US defence strategy
to increase the dependence of other nations’ forces and industries on America. But the [ITAR] regulations have also
hampered the flow of non-critical items and technologies overseas, thereby hindering US companies from competing in
foreign markets. […] This hobbling of US aerospace firms in non-military overseas markets is likely to continue
without some overhaul of ITAR and thus encourage the development of increasingly advanced indigenous military
capabilities in Europe, China, and other countries.” Watts (2008) pp. 56-57
47

Chapter 2: The Intellectual Battlefield: Competing Theoretical Frameworks
2.1 Bound to compete: realism and the BMD / EADS mergers
This chapter analyses the BMD / EADS mergers from the perspective of two major IR theories:
realism and neo-liberal institutionalism (or “neo-liberalism”), whose proponents are locked in a
long-standing fight over intellectual battlefield dominance in IR theory:
“[T]he debate between these two approaches has dominated much of international
relations theory for the last decade. It is now commonplace for an article about some aspect
of international relations theory to begin by locating itself in terms of this debate” 176 .
Historically, realism has long been the pre-eminent school of IR theory. Political and military
leaders in particular, have come to value realism for its theoretical simplicity, its high explanatory
and predictive capacity, as well as its direct applicability to the practice of international relations.
Especially on hard-core defence and national security issues, realism is arguably still the only 800-
pound gorilla in the jungle of IR theories. A PhD student analysing the consolidation of the US and
European aeronautics and defence industry is therefore well advised to take a close look at realism
and the analytical framework that this IR theory provides.
Realism is based on the following key assumptions: 177 First, states are the primary actors in
international relations. In other words, despite the rise of international organisations (UN 178 ,
WTO 179 , etc.) and transnational actors (MNCs, NGOs, etc.), sovereign, independent states remain
the dominant players in the international system today. Sovereign states form governments, raise
taxes, control borders, maintain armies, and are the ultimate source of political control and authority
on their respective national territories.
“Second, the international environment severely penalises states if they fail to protect their
vital interests or if they pursue objectives beyond their means; hence, states are ‘sensitive to
costs’ and behave as unitary-rational agents. Third, international anarchy is the principal
force shaping the motives and actions of states.” 180
176 Powell (1994) p. 313
177 Grieco (1988)
177 Ibid., p. 488
178 UN = United Nations
179 WTO = World Trade Organisation
180 Ibid., p. 488
48

International anarchy means that there is no world government with a (legitimate) monopoly of
force to enforce treaties and rules between sovereign countries. 181 “Fourth, states in anarchy are
preoccupied with power and security, are predisposed towards conflict and competition, and often
fail to cooperate even in the face of common interests.” 182 Realists argue that states live in a self-
help system and cannot base their (military) security on the false promises of multilateral
institutions. A state is “the guardian of its own security and independence”. 183 States must always
fear for their physical survival and are therefore constantly striving to maximise their relative
political, military, and economic power position in the international system. Realists also assume
that there exists a certain hierarchy of issues in world politics, with the so-called “high politics” of
military and security matters dominating the “low politics” of economic and social issues. Hard-line
realists also believe that states are inherently aggressive (“offensive realism”) and that their
insatiable appetite for territorial expansion is only constrained by countervailing (military) force
exercised by other states. “For the political Realist, rivalry and some form of strife among nation-
states are the rule and not a mere accident of backwardness in the past.” 184
“Finally, international institutions affect the prospects for cooperation only marginally.” 185 Realists
identify two major obstacles to cooperation: a state’s concerns about cheating and its concerns
about relative gains. Neo-liberal institutionalists believe that institutions can overcome state
concerns about cheating by providing objective, independent verification mechanisms to ensure that
all partners involved really live up to their commitments. Realists, however, argue that, in the end,
states are more concerned about relative rather than absolute gains from cooperation. For example,
even if two states cooperate successfully, one of the partners may still decide to terminate
cooperation if it believes that the other state derives a relatively greater benefit from cooperation.
“According to realists, states worry that today’s friend may be tomorrow’s enemy in war, and fear
that achievements of joint gains that advantage a friend in the present might produce a more
dangerous potential foe in the future.” 186 Neo-liberal institutionalism, realists would argue, does
only address a state’s concerns about cheating, but not the dilemma posed by concerns about
relative vs. absolute gains from cooperation.
Classical realism can be traced to Greek antiquity (Thucydides “Peloponnesian War”; 431 BC) and
was subsequently shaped by important thinkers and politicians such as Niccolò Machiavelli (“The
181 Neo-liberal institutionalism does not claim that there is a world government. However, it does claim that cooperation
among sovereign states is a positive-sum game and that institutions can promote cooperation among them.
182 Grieco (1988) p. 488
183 Spanier (1978) p. 11
184 Thompson (1952) p. 446
185 Grieco (1988) p. 488
49

Prince”; 1532), Thomas Hobbes (“Leviathan”; 1651), Cardinal de Richelieu (who formulated the
concept of “raison d’état”), Carl von Clausewitz (“On War”; 1832). Classical realism is based on a
gloomy view of human nature. The rise of (modern) realism in the 20 th century was above all a
response to the disillusionment with utopian / liberal ideas following the failure of the League of
Nations, the devastation of WWII, and the beginning of the Cold War superpower confrontation.
The term “realism” itself derives from the German word “Realpolitik”. It was originally coined in
the 19 th century by Otto von Bismarck, who combined the Spanish adjective real (royal) and the
German noun Politik (politics) and proved to be a master in balance-of-power politics – a key
concept of realism.
The period following the end of WWI, supposedly the “war to end all wars, was characterised by
enormous optimism and a belief in the possibilities of peaceful cooperation – expressed both in the
theory and practice of international relations. President Wilson framed his Fourteen Points as a
basis for permanent international peace. By banning secret treaties, reducing (offensive) weapons
arsenals, applying the principle of self-determination and, most importantly, founding the League of
Nations, Wilson hoped, states would be finally able to overcome the scourge of war. And “idealist”
IR theorists at the time saw it as academia’s responsibility to be another nail in the coffin of armed
conflict.
In “The Twenty Years Crisis, 1919-1939: An Introduction to the Study of International
Relations” 187 , Edward Carr provides a critical analysis of the “idealist” twenty-year period between
WWI and II. Carr, who published his book shortly after the outbreak of WWII, exposes the wishful
thinking and naïve belief in the power of international law that was so widespread at the time. He is
particularly critical of the League of Nations, an institution that President Wilson proposed but
could not get approved by the US Senate due to the strong isolationist sentiment in America at the
time. In Carr’s view, international law is the law of an “undeveloped and not fully integrated
community” and “lacks three institutions which are essential parts of any developed system of […]
law: a judicature, an executive and a legislature.”
After the enormous material and moral devastations of WWII, realism became the dominant school
of IR theory in America. Hans Morgenthau and his seminal 1948 book “Politics Among Nations:
The Struggle for Power and Peace” 188 had arguably the biggest impact on (realist) IR theory,
186 Ibid., p. 487
187 Carr (1964)
188 Morgenthau (1973)
50

turning it into a US-dominated academic discipline. In the first chapter, Morgenthau laid out the
“Six Principles of Realism”:
1. Politics is governed by objective laws.
2. A state’s interests are defined in terms of power.
3. National interest is identified with national survival.
4. States are not subject to universal moral principles.
5. Morals have no place in foreign policy.
6. The political sphere is autonomous.
While Morgenthau’s contribution to realism is heavily influenced by his pessimistic image of
mankind, the neo-realist theory of IR focuses much more on the structural forces shaping the action
of states in the international system. In “Man, the State, and War”, Kenneth Waltz laid the
intellectual foundations for neo-realism by identifying three relevant “images” or levels of analysis
for the study of IR. First-image explanations are concerned with how the actions of individual
human beings (for example as statesmen, generals, scientist, etc.) are shaping international politics.
Second-image explanations, in contrast, are concerned with how the internal structure and
characteristics of states – i.e., whether a country is a democracy or dictatorship, rich or poor,
capitalist or communist, stable or unstable, ethnically homogenous or diverse, etc. – affect the
interactions among them (i.e., cooperation vs. conflict, etc.). Finally, the third image focuses on
how the overall distribution of power in the international system (i.e., uni-, bi-, and multipolar
structures) affects the foreign and domestic policy choices of individual states.
In “Theory of International Politics”, Kenneth Waltz further refined neo-realism based on systemic
third-image analysis. 189 He defines structure as a “set of constraining conditions”. 190 Waltz refers to
first- and second-image approaches as “reductive explanations”, implying that they are insufficient
in explaining and predicting international politics. Juxtaposing realism’s reductive and systemic
explanations, one author put it succinctly:
“Fixing [structural] constraints and varying units’ attributes comprise the essential
conceptual experiment underlying reductive explanations. […] Fixing the units’ attributes
and varying the constraints facing the units comprise the fundamental conceptual
experiment underlying systemic explanations.” 191
189 Waltz (1979)
190 Ibid., p. 73
191 Powell (1994) p. 316
51

Both realists and neo-realists agree that international relations are in a state of anarchy, i.e., there is
no authority / institution above the independent, sovereign states with an effective monopoly of
force and the legitimacy to enforce international law and agreements between states; both are state-
centric and regard the nation state as the most important unit of analysis for the theory and practice
of IR; both view international politics as inherently competitive; both emphasize material factors,
rather than nonmaterial factors, such as ideas and institutions; and both assume states are egoistic
actors that pursue self-help strategies.
Neo-realists differ from realists in that they believe that qualitative differences in the structure of
the international system have a direct, generally predictable, impact on the interactions among the
states composing the system. According to Waltz, “the idea that international politics can be
thought of as a system with a precisely defined structure is neo-realism’s fundamental departure
from traditional realism.” Furthermore, neo-realists put much more emphasis on the economic
dimensions of power (as opposed to classical realists who focus almost exclusively on a country’s
military might); neo-realists recognize that policymakers face important, difficult choices when it
comes to trade-offs between the pursuit of military might and economic welfare (“guns vs. butter”
dichotomy). Realists, in contrast, believe that a state’s long-term pursuit of military power and
security always and automatically takes precedence over any near-term economic and trade
interests.
Multipolarity, bipolarity, and unipolarity are the most important structural configurations of the
distribution of power in the international system. For neo-realists, the international system’s
structure affects the foreign policy decisions of states first and foremost through balancing of power
dynamics. On the one hand, each state desires, in principle, to become the international system’s
most powerful actor, or hegemon. At the same time, all other states – while each pursuing
hegemonic ambitions – share a common interest in making sure that no such dominant hegemon
emerges in order to safeguard their own national sovereignty and autonomy. According to balance
of power theory, a rising state will therefore be countered or balanced against by a coalition of other
states in the international system. The risk of war is particularly high during those times when a
rising state is challenging the established distribution of power in the international system or,
alternatively, when a hegemon in decline is trying to fend off potential challengers to its dominant
status.
52

Unipolarity can be a very stable 192 structure for the international system, especially if the hegemon
is dominant in “all the underlying components of power: economic, military, technological, and
geopolitical” 193 . In its most extreme form, unipolarity would describe a situation where one state
enjoys a monopoly of force in the international arena. As a result, such a world government
(“Leviathan”) would bring inter-state war and armed conflict to an end, since no other state would
have the means to challenge the authority of the system’s hegemon. In reality, however, such a
complete and total unipolarity has rarely if ever existed. While bipolarity is less stable than
unipolarity, it is more stable than multipolarity. In a bipolar system, states can more easily balance
and / or deter each other. Once the adversary can be clearly defined, there is less chance of
miscalculation than in a multipolar system. 194 Historically speaking, the Cold War is the most
prominent example of a bipolar international system. 195
In “The Origins of Alliances” 196 , Stephen Walt further refined balance-of-threat theory as an
important element of neo-realist thinking. Walt differs from classic neo-realists like Waltz in that he
believes that states balance above all against threats, not purely against power. The (perceived)
intentions and ambitions of the states involved play a crucial role in foreign-policy making, in
addition to the assessments of their aggregate and offensive power as well as their geographic
proximity. 197 According to Walt, states can adopt two different approaches to respond to a
perceived external threat, i.e., the rise of a (potentially hostile) state. First, they could decide to
directly confront the threat by balancing and / or joining coalitions against the aspiring hegemon.
Alternatively, they could decide to bandwagon and join the coalition of the hegemon in the hope of
maintaining a certain degree of political / military autonomy while at the same time sharing in the
hegemon’s expected future spoils of conquest. In general, Walt expects strong states to balance
against threats; weak states, in contrast, are more likely to bandwagon. Walt also coined and then
disproved the so-called “birds of a feather” theory, according to which states with similar ideologies
will cooperate with rather than fight each other (i.e., Democratic Peace Theory). According to Walt,
however, this theory does not really square with the harsh reality of international politics, where the
balancing against threats is a much more common foreign policy strategy.
192 The characteristics of a “stable” international system are peacefulness and durability. Wohlforth (1999) p. 8
193 Ibid., p. 7. Wohlforth acknowledges that this ‘unipolarity-breeds-stability thesis’ is contested by many neo-realists,
who argue “that any great concentration of power threatens other states and causes them to take action to restore the
balance” Ibid., p. 5
194 WWI demonstrates how strategic miscalculations mixed with alliance politics pushed a multipolar system down the
abyss. The argument that bipolarity is more stable than multipolarity is informed by the relative stability of the Cold
War, during which nuclear deterrence played a crucial role in limiting / containing the outbreak of direct hostilities
between the superpowers. For the opposite argument, see (Deutsch & Singer, 1964).
195 Sparta vs. Athens and Carthagene vs. Rome are other historical manifestations of (regional) bipolarity.
196 Walt (1987)
53

Other important members of the (neo)realist school include John Mearsheimer, Robert Jervis, and
Robert Gilpin. In “Back to the Future: Instability in Europe After the Cold War” 198 , Mearsheimer
predicted Europe’s return to an antagonistic 19 th -century-style multipolar system – including a
resurgent, nuclear-armed, reunified Germany – following the end of the Cold War and the retreat of
US forces from the Old Continent. His prediction turned out to be wrong; but Mearsheimer’s
characterisation of foreign policy as an aggressive power struggle is still accurate in many parts of
the world, most notably in the Middle East and, albeit to a lesser degree, in Asia: 199 “[I]n the
anarchic world of international politics, it is better to be Godzilla than Bambi.” 200
Robert Jervis also made important contributions to IR theory, notably by further refining the
concept of “security dilemma”. Originally developed by John Herz in the 1950s, the “security
dilemma” refers to the fact that an increase in one state’s security decreases the security of the other
states in the system. As state A tries to improve its own security posture, i.e., by building up its
military base, it inadvertently leads states B, C, etc. to do the same as they are now feeling more
threatened by A’s initial military build-up. Ironically, state A may therefore feel more insecure after
the military build-up than before it. In international relations, this cycle of mutual distrust and
insecurity – the “security dilemma” – leads to an escalation of (military) threat perceptions that, in
turn, makes war between all states involved much more likely. From a realist perspective, there is
possibly no way to resolve the security dilemma as the world remains, in essence, a self-help
system where each state has to provide for its own security and cannot realistically rely on
international institutions like the UN to defend its political autonomy and territorial integrity.
In “War and Change in World Politics”, 201 Robert Gilpin develops a theoretical framework for
understanding international political change. In particular, Gilpin attempts to explain the rise and
fall of hegemons (“hegemonic transitions”). Two factors explain why hegemons are ultimately
bound to decline and to be replaced by a rising challenger. First, as a hegemon expands and
(militarily) dominates other countries in the system, it has to devote an ever-increasing share of its
GDP 202 to military and security-related expenditures; this leaves the hegemon with less and less
money to invest into its infrastructure and economic base. Over time, the hegemon’s
197 “States feel threatened when they face powers that combine superior capabilities with geostrategic proximity,
offensive military power, and offensive ideology.” Risse-Kappen (1996) p. 360
198 Mearsheimer (1990)
199 Nuclear weapons, coupled with credible second-strike capacities, have reduced the potential for military aggression
(India vs. China or India vs. Pakistan).
200
(Brzezinski & Mearsheimer, 2005) pp. 46-50
201
Gilpin (1981)
202
GDP = Gross Domestic Product
54

competitiveness declines and it will no longer have the necessary economic resources to sustain its
hegemonic military posture abroad. The second factor precipitating a hegemon’s decline is the
gradual diffusion of technological expertise from the hegemonic core to its periphery. In the long
run, this transfer of (military) technological expertise will reduce the hegemon’s technological
superiority and thus undermine one of the key pillars of its political, economic, and military
preponderance.
This chapter can only provide an overview of (neo-)realist IR theory. By tracing realism back to its
ancient origins, one can show that the theory of IR has often been heavily influenced by the practice
of IR. As a general rule, realist thinking has always thrived at times when the world was particularly
bleak, characterized by war and human suffering. Realism is a pessimistic IR theory based on a
pessimistic image of mankind. Having discussed realism’s key assumptions and main authors, it is
now time to examine the prepositions and hypotheses that realism would make about the BMD /
EADS mergers. By applying realism to these two mergers, it is possible to test the theory’s
explanatory and predictive capacity and to contribute to the advancement of the study of IR. The
key question that this thesis answers is why – following the sharp drop in defence expenditures after
the end of the Cold War – did the US A&D industry consolidate at a national level whereas France,
Germany, and Spain consolidated their major A&D assets at a transnational level and merged them
into one fully integrated European company, EADS?
From a realist perspective, the BMD merger makes perfect sense. In a competitive, anarchic
international system, the American hegemon must be naturally concerned about defending its
dominant military, economic, and technological status vis-à-vis all potential challengers (“no peer
competitor”), including NATO allies like France, Germany, and Spain. 203 For realists, national
autonomy in defence production is of paramount importance and provides the basis for an
independent foreign, security, and defence policy. Even if from a purely economic / business
perspective, a transatlantic merger between Boeing and a major European partner had made more
sense than the BMD merger, realists would still predict that the US government would have
blocked such a move on national security grounds and pushed for ethnocentric consolidation
instead. In the realist world, long-term national security considerations always prevail over near-
term economic considerations. The primacy of “realist” national security considerations in the
strategic A&D industry is not to suggest that America still considers the possibility of future war
203 The US has shared sensitive nuclear technology with the UK for more than six decades and also helped France
acquire nuclear weapons. Both moves run counter to traditional notions of realism, which would assume that
Washington would have kept its nuclear cards close in an effort to maximise its own power and national security
position in the international system.
55

with Europe (or vice versa for that matter). The advent of nuclear weapons fundamentally changed
the nature of war between major powers by adding the elements of mutual deterrence and restraint
that led to the emergence of “a [Cold War] nuclear order”. 204 The outbreak of military hostilities or
full-sale war across the Atlantic – be it at the conventional let alone at the WMD level – remains
unthinkable. However, what the primacy of “realist” national security considerations does mean is
that even among close political, economic, and military allies there will never be a perfect
congruence of political interests and perceptions on all matters at all times and that, as a result, there
will never be full transparency and mutual trust among the countries concerned. 205 Therefore,
governments on both sides of the Atlantic will continue having serious differences over matters
deemed important or even vital to at least one of the parties involved (e.g., 2003 Iraq War).
From a realist perspective, cooperation always carries risks, notably in the form of cheating. But
even if international cooperation works and produces positive, absolute gains for all parties
involved, hegemonic powers – like the US – are concerned about the potential consequences of
their (currently weaker) partners deriving relatively greater gains from cooperation, thus
precipitating the hegemon’s eventual decline. According to realism, states evaluate opportunities for
international cooperation in terms of relative rather than absolute gains. They prefer short-term
relative gains through non-cooperation over potential long-term absolute gains through cooperation.
A transatlantic A&D merger deal would have risked potential US technology transfers that could
undermine America’s technological leadership in this strategic industry sector. Apart from
(defence) technology transfers from to European NATO members, which would take place between
close political, economic, and military allies, a transatlantic merger would also have raised the
spectre of technology transfers to third countries, including US adversaries and competitors like
China. 206 For realists, there is little, if any, room for mutual (permanent) trust between states in the
harsh world of international politics – not even among transatlantic allies. Based on a realist
assessment, America and its defence companies also feared that a transatlantic merger would
provide foreign governments with direct influence over the merged company’s corporate decisions
in strategically important areas such as weapons development and production, relocation of
production sites, and potential future mergers with third companies.
204 Walker (2000) p. 704
205 One indicator of the continued prevalence of mistrust and competition in the international arena is the fact that states
direct conventional political-strategic as well as economic espionage at other countries, including close political and
military allies.
206 US aerospace companies like Boeing have themselves transferred critical technologies to Japan and China by
outsourcing production in recent years.
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It is striking to note that successive US administrations have authorised the transfer of cutting-edge
US technologies to Israel, despite the fact that the Jewish state appears to have repeatedly violated
American re-export controls governing the transfer of such US technologies to third countries like
South Africa, China, and India. 207 208 Unauthorised Israeli re-exports of US military hardware and
technology to Beijing were particularly sensitive as they risked upsetting the regional balance-of-
power, especially across the Taiwan Straits where US forces might have to repel a massive
conventional attack by China on Taiwan. 209 Despite occasional (largely behind-the-scenes)
American criticism of these Israeli arms exports, US military and technology transfers to Israel
continued unimpeded. This lenient and accommodating US technology transfer policy – which runs
counter to what realism would normally expect – can be explained by a strong pro-Israel lobby in
Washington, DC (especially in Congress), a common ideological orientation between America and
Israel (i.e., Israel as the only free and democratic state in the Middle East), and a “framing” of the
210 211 212
definition of strategic threats in the Middle East in ways that favours Israel.
207 “Evidence shows that Israel has systematically circumvented US restrictions on the re-export of US defence
products, components and technical data. […] Israel’s unauthorized retransfer of US defence products is part of a larger
pattern of illicit behaviour that includes diversions of US military aid, industrial espionage, and improper end use of US
military equipment. Israel often retransfers US defence products to states that are potentially hostile to the [US] or are
blatant violators of human rights. These retransfers have threatened American commercial interests, compromised
intelligence, upset regional stability, strained diplomatic relations, and confirmed the US national security
bureaucracy’s long-standing distrust of Israeli technology transfer practices. […] Israel engages in unauthorized defence
re-exports largely to nourish its economy’s large defence sector and because it is confident, for good reason, that
Washington will not or cannot enforce the law.” Clarke (1995) pp. 89-90; 109
208 A 1992 report by the DoS Inspector General declared that alleged Israeli violations of US laws and regulations
“cited and supported by reliable intelligence information show a systematic and growing pattern of unauthorized
transfers […] dating back to about 1983”. DoS (1992)
209 For China, Israel was an extremely attractive arms supplier: “No other country had accumulated as much experience
in fighting Soviet weapons, or in upgrading and integrating them into its own arsenal. In addition, Israel had acquired
some of the most advanced Western weapons systems and also skilfully developed its own. […] Even indirect access to
these systems could enable the Chinese to circumvent the restrictions on transferring military technology to
[C]ommunist countries. Following the 1989 Tiananmen Square massacre, the Israeli connection was vindicated for
Beijing. Israel reacted mildly to the incident and did not impose military sanctions, unlike most Western governments.
Unconfirmed reports suggest that Israel exploited the opportunity to fill the vacuum created by the withdrawal of
Western arms suppliers. Shichor (1998) p. 74
210 “[T]he thrust of US policy in the region derives almost entirely from domestic politics, and especially the activities
of the ‘Israel Lobby’. Other special-interest groups have managed to skew foreign policy, but no lobby has managed to
divert it as far from what the national interest would suggest, while simultaneously convincing Americans that US
interests and those of the other country – in this case, Israel – are essentially identical. […] The Lobby pursues two
broad strategies. First, it wields its significant influence in Washington, pressuring both Congress and the executive
branch. Whatever an individual lawmaker or policymaker’s own views may be, the Lobby tries to make supporting
Israel the ‘smart’ choice. Second, it strives to ensure that public discourse portrays Israel in a positive light, by repeating
myths about its founding and by promoting its point of view in policy debates. The goal is to prevent critical comments
from getting a fair hearing in the political arena. Controlling the debate is essential to guaranteeing US support, because
a candid discussion of US-Israeli relations might lead Americans to favour a different policy. A key pillar of the
Lobby’s effectiveness is its influence in Congress, where Israel is virtually immune from criticism.” (Mearsheimer &
Walt, 2003) London Review of Books. See also (Mearsheimer & Walt, 2003) KSG Faculty Research Working Paper.
For a rebuke of Mearsheimer & Walt, see Cohen (2006).
211 “State and DoD officials say that it is not politically possible to submit to Congress, as an administration proposal, a
lower FMS [Foreign Military Sales] figure for Israel than that for the previous year.” Furthermore, the draft GAO report
stated that “Information relative to any threat assessment, Israel’s defence posture and the needs of Israeli armed forces
were accepted from responsible US and Israeli officials without verification.” Leaked excerpts from the classified 1983
GAO report “US Assistance to the State of Israel”, quoted in (Stork & Wenger, 1983) p. 28
57

According to an authoritative study of trade and investment ties across the Atlantic, the “economic
relationship between the [US] and Europe is by a wide margin the deepest and broadest between
any two continents in history – and those ties are accelerating”. 213
“[T]he transatlantic economy generates roughly US$2.5 trillion in total commercial sales a
year and employs over 12 million workers in mutually ‘insourced’ on both sides of the
Atlantic who enjoy high wages, high labour and environmental standards, and open, largely
non-discriminatory access to each other’s markets.” 214
While transatlantic trade flows totalled US$600 billion in 2005 215 , the report states that they are a
“misleading benchmark of transatlantic economic integration. Foreign investment, not trade, drives
transatlantic commerce […]”. 216 As a result, “foreign-affiliate sales, not trade, are the backbone of
the transatlantic economy”. 217
Despite these close transatlantic economic ties, serious barriers to trade and investment in the A&D
sector continue to be imposed on national security grounds. “Like the [US], European countries
tend to purchase major defence equipment from their domestic companies when such options
exist.” 218 In America, these barriers to defence trade “result from a complex set of rules and
practices aiming at imposing ‘domestic source restrictions’ on US defence acquisition” 219 . These
restrictions are designed “to preserve the domestic mobilisation basis and the overall preparedness
posture of the [US]” 220 by avoiding dependency on defence suppliers based abroad. Key elements
of this protectionist “Fortress America” policy decried by the Europeans include 1) Pentagon
requirements that any major defence procurement items be manufactured on American soil (often
forcing EU and other companies to sell manufacturing licenses to US companies), 2) tight
restrictions on the transfer of technical data by foreign nationals working in America to their parent
companies abroad; and 3) lack of access to tender conferences as well as related security clearances
212 “For over a decade now, Israeli military sales have been the source of much confusion and mythology. Criticism of
Israeli military-technology transfers to China is largely unfounded. The sales actually enjoyed tacit American support
when they started in the 1970s (to Taiwan) and 1980s (to China). Washington’s recent accusations of illegal transfers of
US technologies reflect changed political considerations more than actual facts. Military sales to China have helped
mitigate the economic crisis facing Israel’s defence-industrial complex, have promoted political and strategic relations
between Israel and China, and have had only a limited impact on the Asian balance of power. Israel’s arms-export
control mechanisms, moreover, have been tightened considerably in recent years, while military transfers to China and
Taiwan have drastically declined.” Shichor (1998) p. 68
213 (Hamilton & Quinlan, 2004)
214
Ibid., p. xi
215
EC (2006) p. 8
216
(Hamilton & Quinlan, 2004) p. xi
217
Ibid., p. xi
218
GAO (1997), p. 3
219
EC (2006) p. 43
220
Ibid., p. 42
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for pre-contract award procedures relevant for winning a defence contract from the Pentagon. 221
American defence company officials, in contrast, decry a “Fortress Europe” situation and “say they
cannot export major defence items to Europe without involving European defence companies in the
production of those items”. 222 Such transatlantic industrial partnerships, which often provide
offset 223 benefits to European companies, include subcontracting arrangements, international
consortia, and teaming arrangements. 224
Despite protectionist national security barriers to defence trade on both sides of the Atlantic, it is
evident that America has continued to export overwhelmingly more defence articles and services
than it imports. Commercial US defence exports (American companies selling directly to foreign
entities under an official US export license) averaged US$11.5 billion / year during 2000-2004,
while average annual defence imports amounted only to US$1.8 billion. During the same period,
US military exports as part of the Pentagon’s Foreign Military Sales (FMS) programme –
essentially government-to-government arms sales or grants – averaged US$12.6 billion per year,
while the corresponding annual imports amounted to only US$1.5 billion. 225 Interesting to note is
that “during the same [2000-2004] period, DoD purchases of defence articles and services from
foreign companies decreased from 2.4 percent to 1.7 percent of all DoD purchases”. 226 While these
figures exclude DoD purchases from US subsidiaries of foreign-owned companies, it is obvious that
the (transatlantic) defence trade and procurement business is frequently subject to significant
restrictions justified on national security grounds.
During 1992-1996, Washington’s FMS transactions with Europe amounted to US$20 billion. 227 At
the time, the most important US customers were Turkey, Finland, Greece, Switzerland, the
Netherlands, and the UK. Neither the three future EADS partner countries nor Italy ranked among
the top US clients. Military aircraft, aircraft spares, and aircraft modifications alone accounted for
US$15 billion (75 percent) of America’s FMS transactions with Europe during 1992-1996. 228
“Buy National” procurement policies are common on both sides of the Atlantic. France has
traditionally had the strongest “Buy National” or, alternatively, “Buy European” procurement
221
Ibid., pp. 43-44.
222
GAO (1997) p. 3
223
Offsets can be defined “as the entire range of industrial and commercial compensation benefits provided to foreign
governments and firms as inducements or conditions for the purchase of military goods and services. They include coproduction
technology transfer, training, investment, marketing assistance, and commodity trading” GAO (1996), p. 1
224
Ibid., p. 21
225
GAO (2006) p. 3
226
Ibid., p. 3
227
Excluding commercial sales based on US export licenses.
228 GAO (1997) p. 14
59

policies of any European NATO ally, reflecting “France’s goal to retain a [national] defence
industrial base and maintain autonomy in national security matters” 229 . In essence, “France has
[only] purchased major US defence weapons systems when no French or European option is
available” 230 . According to French MoD officials, “imports represented only two percent of
France’s total defence procurement over the past five years” [1992-1996] 231 . In contrast, the UK
and the Netherlands have traditionally embraced “open competition policies that seek the best
equipment for the best value” and have regularly awarded major defence contracts to American
bidders. 232 US defence companies have been most successful in exporting their goods and services
to European countries when they 1) provided unique, advanced technologies, 2) offered attractive
offset arrangements to local firms, and 3) faced no competition from domestic European
companies. 233 In this context, the third factor is particularly important. While the UK “aims to
competitively award about three-quarters of its defence contracts, […] UK companies [have been]
winning at least 90 percent of the contracts over the past several years” 234 . Finally, Germany and
Italy – which made drastic procurement cutbacks in the 1990s – fall somewhere in between France
and the UK. “Both countries […] have an open competition defence procurement policy and buy a
mixture of US and European products.” 235 While the biggest share of the two countries’ defence
imports has traditionally been supplied by the US, Germany and Italy decided in the 1990s to
purchase major American defence items only in reduced quantities “to reserve a portion of their
procurement funding for European cooperative solutions” 236 .
To bolster the realists’ case, this thesis would have to provide evidence suggesting that the US
government favoured national consolidation over international / transatlantic consolidation for
reasons of national security; possibly despite the fact that an objective and rational cost-benefit
assessment purely based on business and economic factors would have called for international /
transatlantic defence industry consolidation. Such evidence would support realist explanations,
which are based on the assumption that states, when having to choose between economic welfare
(defined in terms of liberal economics rather than mercantilism) and autonomy in arms production,
will virtually always chose the latter. If Washington were conscious of the fact that US industry
consolidation within purely national confines would make it impossible to reach the same levels of
229 Ibid., p. 18.
230 Ibid., p. 17. A good example is France’s 1995 purchase of Boeing KC-135 tanker aircraft (the Airbus alternative was
not yet available).
231 Ibid., p. 14
232 Ibid., pp. 15-17
233 Ibid., p.15
234 Ibid., pp. 13-14
235 Ibid., p. 18
236 Ibid., p. 18
60

increased economic scale and efficiency, it would demonstrate that the US government is literally
willing to pay the price to ensure that they retain autonomous national arms production capabilities.
Furthermore, if it can be shown that the Boeing and / or MDC management teams had
unsuccessfully lobbied the US government for international / transatlantic consolidation, it would
further bolster the realists’ case. Realists view states as the primary actors in international relations.
Especially in the vital military and national security domain, realists would predict that national
governments always prevail over the A&D companies on territory under their jurisdiction and that,
in this key sector, liberal economics does not apply.
To turn to the EADS merger, at first glance, it seems to be completely at odds with the realist IR
theory. States after all, are expected to try to maximise their national autonomy in armaments
production and, by extension, their national security posture. The EADS merger, which involves
three sovereign countries merging their key A&D assets into one single company, poses therefore
significant challenges to the explanatory and predictive capacities of realist IR theory. Realists view
the world through the prism of international competition rather than cooperation. Realist IR theory,
however, can be leveraged to explain the EADS merger. Balance of threat theory, a key element of
realist thinking, is of critical importance in this context. As was discussed earlier, states have in
essence two possible responses when confronted with a potential threat, i.e., a potential or actual
hegemon; they can either balance against or bandwagon with the hegemon. According to Walt,
strong states tend to pursue balancing strategies whereas weak states prefer to bandwagon.
From a realist perspective, the EADS merger can therefore be interpreted as an attempt by France,
Germany, and Spain to balance against the American hegemon in order to preserve the autonomy
and independence of the European A&D industry. In particular, the EADS merger can be
interpreted as a pan-European mobilisation in the transatlantic dogfight between Airbus and Boeing
for supremacy on the world market for large commercial aircraft. When Airbus was launched in the
late 1960s, the consortium could already be viewed as a European attempt to counterbalance the US
to break the American dominance of the (civilian) aircraft market in the non-Communist world. 237
The creation of Airbus can also be viewed as part of a Gaullist French strategy to avoid or at least
minimise US dependence.
237 The Concorde was Europe’s first cooperative civilian airliner project. The UK and French governments saw
supersonic transport as a way to leapfrog US jet aircraft development and to break America’s dominance of the world
commercial aircraft market. Ultimately, the Concorde was both a technological masterpiece and a terrible market
failure.
61

After the end of the Cold War, America emerged as the world’s only superpower. The demise of the
Soviet Union left Europe far less dependent on US security guarantees – making it thus easier for
Europe to attempt to selectively balance against the American hegemon, including in the A&D
industry through the EADS merger. Realists would argue that the three EADS founding countries –
France, Germany, and (albeit to a lesser extent) Spain – were strong and proud enough to balance
against rather than bandwagon with the American hegemon. It does not matter that DASA would
have preferred to merge with BAe rather than with France’s state-controlled AM. All Airbus
partners were scrambling to merge with other aerospace companies to quickly gain the critical mass
necessary to survive the impending onslaught of the American mega-primes. In military aircraft,
too, Americans and Europeans anticipated major competitive struggles:
“[A]ccording to US defence company officials, sales of military aircraft to Europe are
expected to be important in future competitions, particularly in the emerging defence
markets in central Europe. Competition between major US and European defence
companies for aircraft sales in these markets is expected to be intense.” 238
If it can be demonstrated that the decision to form EADS was primarily driven by geostrategic as
well as economic factors rooted in Europe’s desire to balance against America – both in the military
as well as in the civilian / economic domains – realism would be proven right. “The neo-realist
analysis argues that states will start competing and balancing over economic issues after the Cold
War as much as they competed and balanced over security issues during the Cold War.” 239 Realists
would predict that European governments put a premium on pan-European cooperation and
consolidation in the A&D industry – including a full-blown EADS style merger – if that is
perceived to be the only feasible option to at least attempt to form a credible counterweight to
America. Such a prediction, however, assumes that in the case of EADS, France, Germany, and
(albeit to a lesser extent) Spain concluded that they had more to gain from cooperating among
themselves rather than bandwagoning with America. Given Spain’s significant financial and
economic dependence on EU funding, it should not come as a surprise that Madrid decided to throw
its weight behind the Franco-German EADS merger, which was supported by the two most
powerful and influential EU member countries. If key European countries had decided to
bandwagon with rather than balance against the US hegemon, it would have put the European allies
into a position of inferiority vis-à-vis America. While gaining more access to the US defence
market, the Europeans would have lost much of their political, economic, and technological
238 GAO (2007) p. 14
239 Powell (1994) p. 334
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autonomy as a result of unequal transatlantic mergers with the much bigger American mega-primes
like Boeing or LMC.
While realists would expect governments to value national autonomy over potential economic gains
from international collaboration in the A&D industry (especially if it implied a loss of political /
economic sovereignty), it is far more difficult to say what realism would predict about the
preferences of the private sector actors. Realism does assume that sovereign states are the dominant
IR players, leaving little – if any – room for independent corporate policies by private sector
companies. In the case of the BMD / EADS mergers, however, it is necessary to analyse the actions
of both the public sector and the private sector. It should be noted that bandwagoning with America
has been – and in fact remains to this day – a potentially very attractive option for European A&D
companies, especially if it concerns “mergers between equals”. Strictly speaking, however, such
transatlantic mergers would probably not qualify as “bandwagoning”, which involves a weak actor
supporting a hegemon in order to preserve a minimum of autonomy and to share in the spoils of
(future) conquest. Bandwagoning with the American hegemon promises privileged access to the
lucrative US defence market, by far the largest in the world. Bandwagoning with Washington also
raises the spectre of increased transatlantic (defence) technology transfers, especially if the
American government and US aerospace / defence companies have sufficient trust in their
European partners to believe that they would not transfer sensitive know-how to third countries. For
realists, however – who live in a world where mutual trust is a scarce commodity – that is a very big
“if”.
Private shareholders are primarily interested in maximising their return on investment. If
transatlantic A&D mergers – even between un-equals (i.e., smaller European players with American
mega-primes) – are expected to deliver superior company profits / shareholder value, then private
shareholders should have no concerns about the associated loss of political sovereignty of either
their home country and / or the loss of business autonomy of their company. They would be
shareholders of the combined American / European A&D company after the completion of such an
(unequal) transatlantic merger. In contrast, the top management of European A&D companies can
be expected to be much more concerned about the potential loss of power and influence as a result
of an unequal merger with an American mega-prime. The top management of an acquired company
(especially if it is a “hostile takeover”) is often forced to resign or moved to secondary management
positions. Generally speaking, private shareholders care more about how a company is run (i.e.,
how profitable it is) than who is running the company (i.e., whether it’s a Frenchman, German or
American).
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A key analytical question concerns whether the major US and European A&D companies should be
considered as part of their respective home states or not. As a general rule, the stronger the
involvement of governments in this industry sector, the stronger the case for a realist approach to
explain the BMD / EADS mergers as one can then assume that the strategic choices and preferences
of the companies involved were closely aligned with the interests of their home governments
(usually defined in terms of maximising national security and military-technological leadership).
The relationship of A&D companies with their home governments in Europe and America can be
analysed from two different perspectives. First, to what extent, if any, have governments retained
direct equity stakes in their countries’ A&D industrial base, particularly at the prime contractor
level? If key elements of a country’s A&D industry are in fact nationalised and under the financial /
managerial control of the government, then one can argue that, by definition, these companies are
part of “the state”. By this standard, the American A&D industry is separate from the government
since Washington does not hold equity stakes in any of the major contractors. In Europe, in
contrast, countries such as France and Spain have retained direct or indirect (minority) stakes in
companies like EADS. That being said, the UK and West Germany had also been direct A&D
industrial shareholders before pursuing privatisation strategies in the 1980s.
The second benchmark concerns the extent to which senior executives in the A&D sector are
influenced by the stated or anticipated preferences of elected politicians and government officials
when making their own corporate (strategic) decisions. For example, even if a transatlantic A&D
prime contractor merger is a theoretical possibility under US law, corporate leaders on both sides of
the Atlantic (especially in America) are likely to refrain from making any moves in that direction if
(1) they know that the political climate is not conducive to such a step and (2) if they fear that it
could hurt their relationship with key government officials moving forward. The anticipated
negative political fall-out becomes even more important if corporate leaders have reasons to believe
that their attempt to engineer a transatlantic merger could make Washington’s political
establishment (especially powerful defence appropriators on Capitol Hill) upset and thus harm the
companies’ chances of securing future Pentagon contracts. 240 During the late 1990s, both factors
appeared to weigh heavily on the minds of A&D industry executives – repeated administration
statements about the desirability of closer transatlantic defence industrial cooperation
240 The fact that US A&D companies are highly dependent on the Pentagon’s procurement and R&D budgets gives
Washington unparalleled leverage over this industry sector. The higher a company’s economic dependence / market
exposure to the government and / or the country in general, the higher the leverage that political leaders enjoy to ensure
that the respective corporate leaders are not engaged in business practices deemed harmful to the national interest.
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notwithstanding. The third benchmark concerns the degree of influence the companies wield,
directly or indirectly, over the respective governments as well as the closeness of the links between
company leaders and political leaders. This last aspect is particularly relevant with regard to the
influence of the MIC and the massive procurement lobbying campaigns by defence contractors vis-
à-vis Congress.
It is also necessary to look at the overall impact of the A&D industry’s rapid consolidation on the
relationship between this sector and the government. To the extent that previous rounds of
consolidation significantly reduced the competitive dynamics at the prime contractor level, one
should expect this process to cause a corresponding shift in the balance of power in favour of the
private sector. The government’s decreased ability to find suitable bidders for major defence
procurement contracts should generally translate into increased pricing power for those remaining
companies still able and willing to participate in these tenders. This is what one would expect in a
“normal”, non-strategic industry sector. The sharp reduction in competition as a result of successive
rounds of consolidation has led former top Pentagon officials to warn that the “The [US] is
approaching an ‘arsenal system’ for developing and producing its weapons – that is, one in which
the government manufactures its own weaponry.” 241 In an arsenal-type system, the A&D industry is
fully controlled by the government and part of “the state”. The sharp reduction in the number of US
prime contractors coupled with the post-Cold War decrease in the Pentagon procurement budget –
which, at least until 9/11, meant fewer dollars and fewer programmes to compete for – therefore led
to increased interdependence between the A&D industry and the state. Ultimately, however, the
state is the dominant player as it provides major R&D support and is often the industry’s sole
customer. And even if potential export markets can provide for an expanded customer base, it is the
US administration and ultimately Congress that decide what kind of (dual-use) technologies and
military hardware the A&D companies get to export and what not. In that sense, the strategically
important American A&D industry is closely linked with and dependent on the state, even though it
remains formally independent and generally privately-owned.
Mercantilism, the economic dimension of realism, also offers relevant insights into the EADS and
BMD mergers. From the 16 th to the 18 th century, the period that coincides with the emergence of
European nation states, mercantilism was the dominant school of economics. While mercantilism
never developed into a unified theory of economics, its chief proponents like Jean-Baptiste Colbert
(1619-1683), King Louis XIV’s finance minister, shared a common belief that the wealth, status,
and power of a state are a function of its holdings of capital. “It is simply, and solely, the abundance
241 (Zakheim & Kadish, 2008)
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of money within a state [which] makes the difference in its grandeur and power”, as Colbert put it
succinctly. Furthermore, mercantilists also agreed on the zero-sum nature of the international
economic system, where the global volume of trade is “unchangeable” and where the gain of one
country comes at the direct, inevitable loss of another. To maximize their power, states therefore
had to strive to maximize their (state-controlled) hard currency holdings (precious metals such as
gold or silver at the time). 242 According to mercantilists, the best strategy for a country’s
government to grow and maximize its capital account surplus was to encourage exports and to
discourage imports, primarily through the imposition of high tariffs. Essentially, mercantilism calls
for a highly interventionist economic / industrial policy where the state creates national champions
and shields them from foreign competition.
In 1663, Colbert provided state financial and technological support to “Les Gobelins”, the Royal
Manufacture of Tapestries, to create the first-ever French “national champion” which would
subsequently be able to out-perform its foreign competitors and to increase the country’s export
revenues. Colbert was thus the first European to champion state intervention in a particular industry
with positive results. Mercantilism also proved to be quite influential in America, where Alexander
Hamilton, the first US Treasury Secretary, “believed that the state, not the free market, was the true
source of economic prosperity”. In his “Report on Manufactures” written in 1792, he urged
Congress to embrace mercantilist, protectionist policies to boost the American economy. In
particular, Hamilton advocated high tariffs to (1) protect key American infant industries, (2)
increase government revenues, (3) encourage an entrepreneurial spirit, and (4) transform the newly
independent US into a technologically advanced manufacturing power.
In “The Wealth of Nations”, Adam Smith strongly rejected mercantilism and protectionism and
made the case for free trade based on the principle of both absolute and, more importantly, relative
competitive advantages among the different countries of the world. Smith thus laid the foundations
for what is known today as classical or laissez-faire economics. While mercantilism remained
influential until the end of WWII – witness the competitive, export-promoting rounds of currency
devaluations in Europe in the 1930s – Smith’s free-trade agenda provided the intellectual basis for
the US-built post-WWII international economic system as well as the successive GATT / WTO
trade liberalisation rounds designed to promote free trade through the continuing reduction and
eventual elimination of tariffs and non-tariff trade barriers.
242 “Because military prowess underpins states’ ability to acquire territory, dominate their collectivities, and achieve
hegemony, states have depended upon capitalists and capital accumulation to furnish military resources crucial to geo-
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Despite public pronouncements in support of trade liberalisation, Western political leaders,
especially in France and the US – have retained strong mercantilist or rather protectionist instincts,
especially with regard to strategic industry sectors. The French tradition, from Colbert, and the
American tradition, from Hamilton, have deep roots in the A&D industry. Past and present
government interventions in the A&D industrial base have drawn heavily on mercantilist ideas,
coupled with national security considerations linked to the sector’s strategic importance. Civil and
military aircraft sales are big-ticket items that have an important impact on a country’s balance of
payment figures. To this day, Boeing remains America’s biggest corporate exporter at a time when
the US trade deficit seems to be growing ever bigger, especially vis-à-vis China. US merchandise
trade statistics demonstrate that the American A&D industry has consistently ranked as the nation’s
top exporting sector for more than two decades. In 2008, that leading export earner had a positive
trade balance of US$62 billion, the only bright spot in an otherwise gloomy trade statistic indicating
that America had a total trade deficit of US$816 billion – driven by imports of energy (-US$415
billion), electric machinery / consumer electronics (-US$99 billion), and cars / trucks (-US$83
billion). 243 Georgetown’s Theodore Moran laid out the three key elements of “An Economics
Agenda for Neorealists” 244 designed “for those who wish to pursue relative gains at the expense of
mutual gains, or political power at the expense of economic welfare” 245 : 246 (1) restoring equilibrium
in trade and capital accounts; (2) enhancing the competitiveness of American firms and workers;
and (3) avoiding dependence on foreigners:
“An economics agenda for neorealists should address three principal dangers to America’s
position in the international political system that emerge directly from US economic policy:
a persistent imbalance in trade and capital accounts, which mortgages the assets of future
generations or turns over the assets of the current generation to foreigners; a lagging
competitiveness of firms and workers, which undermines the growth rate and skill level of a
nation’s industrial base (and other sectors) in comparison to rival states; and a growing
dependence on outsiders for critical products or technologies, which leaves the nation
vulnerable to denial or manipulation by external suppliers.” 247
political endeavours and internal pacification.” Gritsch (2005) p. 5
243
For US merchandise trade statistics covering 1989-2008:
http://tse.export.gov/NTDChartDisplay.aspx?UniqueURL=0pbpvr55wbczqmixsmsyq455-2009-10-31-10-16-1
244
Moran (1993) pp. 211-215
245
Ibid., p. 211
246
“[I]n the context of geo-economics, relativities trigger concern because they are seen as affecting the capacities of
countries to defend themselves.” Cable (1995) p. 312
247
Moran (1993) p. 211
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Old-school mercantilists focused on promoting exports and curbing imports through tariffs and
subsidies. Modern mercantilists have a more sophisticated understanding of the economic dynamics
at play:
“As long as a country consumes more than it produces, it will experience a trade deficit and
a corresponding reliance on foreigners to finance it. Trade protection and investment
restrictions, strategic or otherwise, cannot alter this; neither can vigorous efforts to open
external markets for products or capital.” 248
Protectionist sentiment in Europe is particularly strong in France, where political leaders
euphemistically talk about “patriotisme économique” 249 and “intelligence économique” 250 . The
first term is code for protectionist state interventionism and includes the creation of national
champions in strategic industries as well as the protection of national (often state-owned) French
companies against (hostile) foreign takeovers. This protectionist behaviour was illustrated by
France’s blocking of an attempted takeover of French utility company Suez by Italy’s energy giant
Enel in early 2006. Critics of these narrowly-defined national protectionist policies see them as
completely outdated and instead call for “une solidarité économique européenne”, hailing EADS
as “une véritable avancée pour l'Europe!” 251 .
“Intelligence économique” describes more broadly how the (French) government should strive to
promote – in conjunction with the private sector, academia, civil society, etc. – the country’s
(economic) interests in an effort to boost overall national competitiveness and preserve the nation’s
social and economic system in the context of an increasingly globalised economy. A June 2003
report commissioned by the French Prime Minister defined the ultimate goal of “intelligence
économique” to contribute to “a France that is wealthier, better protected and more respected” […],
which shares her progress with her commercial allies, notably in Europe”. The report also argues
that “intelligence économique” can help France achieve
“the protection of her scientific and industrial heritage, gains in competitiveness and
market shares, and a renewed influence in the world, especially among all those who do not
want to depend on one exclusive supplier and, furthermore, all those who, within
international organisations, do not want to accept the twisting and the rejection of the rules
248 Ibid., p. 212
249 French Prime Minister de Villepin referred to “patriotisme économique” in July 2005 on the occasion of a hostile US
takeover launched against France’s dairy company Danone.
250 Carayon (2003)
251 Allègre (2006)
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of international law: yesterday those of Kyoto, today those of the UN, and tomorrow,
perhaps more than yesterday, those of the WTO”. 252
From a mercantilist perspective, the BMD and EADS mergers were supported by the US on the one
hand, and France and Germany on the other hand, to ensure that a) each of the two aerospace giants
could reap economies of scale allowing them to become more competitive and to capture an ever-
bigger share of the world’s civil and military aerospace market; and b) to allow each of the national
governments involved to benefit from additional tax revenues, increased civil and military
technological sophistication as well as heightened international prestige as a result of the
commercial success of “their” respective aerospace champions.
252 Carayon (2003) p. 11
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2.2 Bound to cooperate: neo-liberal institutionalism and the BMD / EADS mergers
The other IR theory that this thesis applies to the BMD / EADS mergers is neo-liberal
institutionalism, which forms part of liberalism. In IR theory, liberalism comprises four distinct
schools of thought: 1) classical / utopian liberalism; 2) economic interdependence liberalism; 3)
democratic peace liberalism; and 4) neo-liberal institutionalism.
Classical / utopian liberalism is rooted in the belief in human progress and perfectibility. It assumes
that men – based on education and rational deliberation – can become better, more rational human
beings and are thus able to overcome their own egoistic, aggressive, and violent impulses. Classical
/ utopian liberalism expects that men will cease to fight wars once they have realised that warfare is
irrational and destructive. The economic interdependence school of liberalism is based on the
assumption that increased international economic interdependence (more trade and FDI, etc.) will
decrease the risk of war between all countries involved. As a result of economic interdependence,
so the argument goes, states have an economic interest in the economic well-being and political
stability of their neighbours and commercial partners. Therefore, the launch of military attacks
against one’s trade partners or, alternatively, the failure to prevent the outbreak of hostilities among
one’s trade partners, can cause massive economic disruptions, including the (partial) destruction of
a country’s FDI in the war-torn countries or the cut-off from vital supplies like oil; gas, and other
(raw) materials, goods, and services imported from abroad. The democratic peace theory is based
on the assumption that liberal democracies never fight wars against one another. Liberal
democracies, so the argument goes, share the same fundamental values of individual freedom,
political participation, private property, and equality of opportunity and are therefore not likely to
attack like-minded countries. The road to international peace therefore lies in the promotion of
liberal democracies around the globe.
Neo-liberal institutionalists (or “neo-liberals”) share the realist beliefs that the international system
is anarchic and that states are self-interested actors who want to maximise their political, economic,
and military well-being. Since cooperation among countries is expected to produce superior results
for all parties involved, states have, in principle, an interest in pursuing cooperative rather than
confrontational policies. Such cooperation, however, does not come automatically as a result of
(economic) interdependence. Rather, international cooperation will only happen if there are proper
institutions that shape the behaviour of states and change the expected future costs and benefits
associated with certain types of either cooperative or confrontational behaviour. All four schools of
liberalism believe that – given the right framework and circumstances – states’ common interest in
cooperation (exemplified through superior cooperative policy outcomes) can overcome their
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deeply-entrenched reliance on (confrontational) self-help strategies in pursuit of national autonomy
and security. For liberals, it is possible to bridge the divide between national self-interest and
common interest as states can / should give up confrontational self-help strategies and national
autonomy in favour of increased international cooperation.
Liberalism and realism have important differences. First, realism is driven by the competitive
dynamics among unitary state actors struggling to achieve primacy in security and defence matters
(or, at a minimum, to ensure their national survival). Liberals describe the world from an economic
perspective and therefore reject the realist notion that military security trumps everything else.
Liberals believe that private-sector companies can be IR actors in and of themselves, generating the
mutual gains derived from international cooperation (through trade and FDI ties), and thus
challenging the realists’ belief that states are unitary actors focused exclusively on maximising their
(relative) national security gains rather than maximising their (absolute) economic gains. Second,
realism is much more static than liberalism. Realists believe that in order to know the future, it is
simply necessary to study the past because the fundamental characteristics and behaviour patterns
of states and human beings are not going to change over time. Liberalism believes that the future
can be fundamentally different from the past and that states and human beings can break out of the
ancient cycles of warfare, distrust, and violence. While proponents of classical / utopian liberalism
believed in the perfectibility of men, today’s neo-liberal institutionalists believe that the right
institutions will promote better relations among states.
Seventeenth-century British philosopher John Locke was the first to draw together the main tenets
of liberalism, many of which had previously been developed by the Dutch legal scholar Hugo
Grotius. Philosopher Immanuel Kant was the first to develop a blueprint for how to achieve
permanent peace and reconciliation among states in the international system. In “Perpetual Peace”
(1795), Kant argues that war could be banished if every state was organised as a republic, based on
the consent of those governed. Kant laid the intellectual foundations for the Democratic Peace
Theory that emerged in the 1980s. In his 1913 bestseller “The Great Illusion” 253 , Norman Angell
claimed that “military and political power give a nation no commercial advantage, that it is an
economic impossibility for one nation to seize or destroy the wealth of another, or for one nation to
enrich itself by subjugating another”. Following the destructions of WWI, President Woodrow
Wilson’s League of Nations was an ambitious, yet ultimately ineffective attempt to finally
overcome the scourge of war. 254 The outbreak of WWII was the last nail in the coffin of the League
253 See Angell (2006)
254 The Republican-controlled Senate rejected Wilson’s “League of Nations” and Treaty of Versailles in 1919 and 1930.
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of Nations and its concept of collective security where one state could supposedly trust that its
security and territorial integrity would be defended against outside aggression by the collective
solidarity of the international community.
The beginning of the European integration process after WWII led to a renewed focus on the
potential for international cooperation. The functionalist / neo-functionalist theory of international
relations – developed in the 1940s, 1950s, and 1960s – is an important part of the intellectual
antecedents of neo-liberal institutionalism. Heavily influenced by the nascent European integration
process, neo/functionalists argued that existing barriers to closer cooperation among sovereign
states in the “high politics” realm of foreign policy, security, and defence matters (i.e., competition,
anarchy, the security dilemma, etc.) could best be overcome through gradual international
integration in the “low politics” of economic and social affairs. 255 Over time, so the neo-
functionalist line of reasoning, the trust and mutual (economic) benefits derived from successful
economic integration and their corresponding new international institutions will create powerful
“spill-over effects” that lead to increased international cooperation in the “high-politics” of security
and defence matters. Ernst Haas defined political integration as “the process whereby political
actors in several distinct national settings are persuaded to shift their loyalties, expectations, and
political activities toward a new centre, whose institutions possess or demand jurisdiction over the
pre-existing national states”. 256
In his influential 1983 article “Kant, Liberal Legacies, and Foreign Affairs” 257 , Michael Doyle lays
out the so-called Democratic Peace Theory. Inspired by Kant, Doyle identifies several reasons for
why liberal democracies do not go to war with each other. First, citizens in democracies are very
cautious to support going to war, as they would have to pay higher taxes for increased defence
expenditures, suffer potential material destruction, and risk being wounded or killed as a result of
military action. Second, liberal democracies have an inherent respect for one another as a result of
their shared fundamental values of individual freedom, political participation, private property,
equality of opportunity, etc. Third, liberal democracies, based on mutual trade and FDI, are
dependent on each other for their economic welfare and prosperity. This economic interdependence
makes war between liberal democracies extremely costly for all parties involved. Finally, Doyle
argues that increased international interactions as a result of opening societies, expanding trade, and
new (communications) technologies will contribute to an increased understanding and appreciation
of other countries and cultures.
255
Haas (1958); Haas (1964); Mitrany (1966)
256
Haas (1958) p. 16
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Let’s turn to neo-liberal institutionalism, the most potent challenger to the dominance of neo-
realism in modern IR theory. In “Power and Interdependence”, Robert Keohane and Joe Nye
challenge several key realist assumptions and develop neo-liberal institutionalism as a major IR
theory. First, in disputing the primacy of states, Keohane and Nye point to the rise of international
organisations, MNCs, NGOs, etc. in world politics. They also challenge the realist notion that states
are coherent, unitary actors, arguing that different branches of government as well as different
ministries / parts of a state’s bureaucracy can pursue different, even contradictory policies. 258
Second, talking about the declining importance of military force in modern politics, Keohane and
Nye maintain that “particularly among industrialised, pluralist countries, the perceived margin of
safety has widened: fears of attack in general have declined, and fears of attack by one another are
virtually non-existent.” 259 Finally, Keohane and Nye challenge realism’s primacy of “high politics”
over low politics”. While conceding that “military power remains important in some critical
domains of international relations”, they also point out that “information technology has some
effects on the use of force that benefit the small and some that favour the already powerful. […]
The key, however, will not be the possession of fancy hardware or advanced systems, but the ability
to integrate a system of systems.” 260 Keohane and Nye also coined the term “complex
interdependence” to describe their perspective on world politics: first, states and their societies are
connected through a complex web of multiple actors and institutions, including national
governments, international organisations, MNCs, individuals travelling as tourists, etc.; second,
there is no hierarchy among military, economic or social issues; and finally, military force is not
used between states linked through complex interdependence.
In “After Hegemony” 261 , Keohane further develops neo-liberal institutionalism by arguing that
international institutions can foster cooperation even under (neo-)realist conditions of an anarchic
system where all states are self-interested actors trying to maximise their political, economic, and
military power. The main impediment to international cooperation is the fear of states that the other
countries in the system will cheat or defect (prisoner’s dilemma). Keohane argues that states are
interested in maximising their long-term absolute gains, a goal that can normally only be realised
through international cooperation. Since cheating / defecting is the main obstacle, so the neo-
liberalist argument, international institutions play a crucial role in promoting international
257 Doyle (1983)
258 The tensions between the hawkish DoD and the dovish DoS prior to the 2003 Iraq War illustrate how different parts
of the same bureaucracy can pursue very different political agendas.
259 Betts (2002) p. 123
260 (Keohane & Nye, 1977) p. 27
261 Keohane (1984)
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cooperation by providing independent and objective verification mechanisms to ensure that all
states live up to their declared commitments. Keohane’s main criticism of neo-realism, in essence,
is that it over-emphasises inter-state conflict / confrontation while at the same time underestimating
the potential role of international institutions in fostering inter-state cooperation. 262
There are two defences against Keohane’s neo-liberal critique of neo-realism. 263 First, at a
theoretical level, neo-realists could argue that Keohane’s choice of the repeated prisoner’s dilemma
as the appropriate game theoretical model is in fact incompatible with the neo-realist assumptions
about the international system. Joseph Grieco criticises Keohane for using the repeated prisoner’s
dilemma and thus implicitly assuming that states are more concerned about maximising absolute
gains rather than relative gains. 264 “Neo-liberalism’s claims about cooperation are based on its
belief that states are atomistic actors. It argues that states seek to maximise their individual absolute
gains and are indifferent to the gains achieved by others.” 265 Consequently, Grieco argues,
Keohane’s claim that states confronted with the repeated prisoner’s dilemma will eventually – as a
result of the shadow of the future – reach a cooperative equilibrium where they do no longer defect
for short-term gain, does nothing to disprove neo-realism. Second, at an empirical level, neo-realists
could counter that they never claimed that neo-realism was incompatible with instances of
international cooperation. Therefore, Keohane’s (correct) observation that states do in fact
cooperate under certain conditions is not to say that neo-realists got it wrong:
“The real question is how much international cooperation exists and whether neo-realism
or neo-liberalism does a better job of accounting for the observed patterns of international
cooperation. This response would then go on to compare the relative explanatory power of
these two approaches.” 266
The objective of this thesis is precisely to compare the relative explanatory power of neo-realism
and neo-liberal institutionalism with regard to the lack as well as the existence of international
cooperation during the post-Cold War consolidation of the US and European A&D industry –
262 Insights from game theory also supported neo-liberal institutionalism. Repeated games indicated that players could
“learn” to cooperate in positive-sum games. “The essence of the neo-liberal institutional analysis of the problem of
cooperation is that the shadow of the future may lead the egoistic states hypothesised in structural realism to cooperate.
Repeated interaction gives each actor the ability to punish uncooperative behaviour today with future sanctions. If the
shadow of the future looms sufficiently large, then the future costs to uncooperative behaviour will outweigh the
immediate gains; and, weighing costs against benefits, even egoistic states will cooperate. This logic is, in turn,
formalised in the neo-liberal institutional analysis with a repeated prisoner’s dilemma in which mutual cooperation can
be sustained as an equilibrium outcome with a strategy of punishing defection should it occur.” Powell (1991) p. 1306
263 Keohane (1984) pp. 326-329
264 Grieco (1988)
265 Ibid., p. 487
266 Powell (1994) p. 328
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exemplified by the BMD / EADS mergers. Which theory – neo-realism or neo-liberalism – explains
better why states opted for or against international cooperation when deciding on the future
structure of their national A&D industry? The first part of this chapter has already laid out the
different predictions and hypotheses that (neo-) realism would make about the two mergers. The
ethnocentric BMD merger was an attempt by the American hegemon to preserve its military-
technological dominance vis-à-vis the rest of the international system, including close Western
European allies. The regiocentric EADS merger, in contrast, was an attempt by key European
countries like France and Germany to balance against the American hegemon by forming a potent
industrial counterweight to the crushing dominance of US mega-primes like Boeing.
There are three major fault lines separating neo-realism and neo-liberalism 267 : 1) the meaning and
implications of anarchy; 2) the problem of absolute vs. relative gains; and 3) the tension between
coordination and distribution. First, realism defines anarchy as the absence of a central authority
with the legitimacy / capacity to enforce order, treaties, and rules among states in the international
system. This broad notion of anarchy refers to the overall structure of the international system and
can easily be transposed to other (anarchic) systems, notably in the economic / business domain.
The other notion of anarchy argues that the sovereign states constituting the system can and will
eventually resort to military force to preserve their independence. Neo-liberals, however, believe
that this second notion of anarchy is no longer applicable today,
neither in terms of relations among Western allies nor in terms of relations among the world’s
major states. Today, military conflict among the world’s major powers – especially between Europe
and the US – over international primacy is virtually unthinkable. Even Samuel Huntington – who
has argued in favour of continued US primacy in the world based on a neo-realist theoretical
framework – concedes that “military conflict between major states is unlikely” 268 . Neo-liberals
therefore believe that states – living under the conditions of a type of anarchy that is no longer
shaped by the potential use of military force but simply characterised by the absence of a central
authority – will feel less of an incentive to balance against a current or potential hegemon. Hence,
the neo-realist explanation of the EADS merger as a European attempt to balance against American
hegemony does not make much sense from the neo-liberal perspective.
Neo-realists, however, counter that “states [have started] competing and balancing over economic
issues after the Cold War as much as they competed and balanced over security issues during the
267 Ibid., pp. 329-343
268 Huntington (1993) p. 93
75

Cold War” 269 . Given that the BMD / EADS mergers involved both high military (security) and
civilian (economic) stakes, neo-realists would contend that the European decision to balance against
the US was fully justified and understandable because of serious concerns and concrete threat
perceptions in Europe in the realm of security and economic affairs.
Second, neo-realists and neo-liberals argue over whether states are more concerned with relative or
absolute gains. As Waltz put it, “states that feel insecure must ask how the gain will be divided.
They are compelled to ask not ‘Will both of us gain?’ but ‘Who will gain more?’”. 270 Neo-liberals,
in contrast, believe that states are primarily focused on maximising their absolute gains from
(potential) international cooperation. According to Keohane, states’ preferences “are based on their
assessments of their own welfare, not that of others” 271 . If neo-realists got it right, cooperation
among states is much more fragile and difficult to establish than neo-liberals assume. For the latter,
any type of cooperative international arrangement that works fine and produces positive, absolute
gains is likely to continue as long as none of the states defect. However, if countries are primarily
interested in maximising their relative gains – that is, if they want to make sure that their
cooperation with other states does not benefit these countries disproportionately, thus leading to a
negative shift in their own relative international power position – then states will constantly assess
their on-going benefits from cooperation and compare them to the kind of perceived / assumed
benefits that their partners derive from these cooperative arrangements. The neo-realists focus on
maximising relative gains adds an important element of uncertainty since the continuation of
international cooperation is always subject to a state’s potentially changing (subjective) assessments
about its relative benefits from working together with other countries. Neo-liberals, in contrast, are
primarily concerned with making sure that all states involved do not cheat so as to maximise the
positive, absolute gains derived from international cooperative arrangements.
International organisations and regimes play an important role in reducing uncertainty by providing
independent, objective verification mechanisms to ensure that all states live up to their declared
commitments. International institutions also reduce transaction costs by establishing permanent
channels of communication among all participating partners. Finally, international institutions also
extend the “shadow of the future” and raise the (expected) costs of potential defection for states
considering whether or not to engage in international cooperation. Interestingly, there is a debate
among neo-realists about the extent to which a state’s concern about maximising its relative gains is
conditioned by the overall strategic setting it is confronted with. States that find themselves in high-
269 Powell (1994) p. 334
270 Waltz (1979) p. 105
76

isk, high-stakes environments are more likely to focus on maximising relative gains as they are
more sensitive to potential negative shifts in their relative overall security posture as a result of
(imbalanced) international cooperation. 272
Finally, neo-realists and neo-liberals differ over the tension between coordination and distribution –
that is, the extent to which the existing relative power positions of states shape the potential
collaborative and institutional arrangements among them. By definition, there are different ways to
distribute the potential joint gains from international cooperation. “These multiple ways of
achieving the joint gains from cooperation can create conflicts over how those gains will be
distributed.” 273 Neo-realists assume that, ultimately, the relative distribution of gains from
international cooperation will directly reflect – or, at a minimum, closely resemble – the relative
power position of all states. Furthermore, as states’ relative power positions change over time,
existing international institutions and arrangements for the distribution of joint gains are potentially
subject to renegotiation if the system’s increasingly powerful players believe that they deserve a
bigger piece of the collective joint-gains pie. Neo-realists regard international institutions as
dynamic arrangements that reflect the interests of the system’s most powerful actor(s) and also
track changes in the concerned states’ relative power position over time.
Neo-liberals believe that institutional rules and frameworks can alter state behaviour and lead to
policy outcomes different from what a hard-nosed look at the relative power position of the
respective countries involved would otherwise suggest. States, so the argument goes, agree to set up
international institutions primarily to overcome existing obstacles to international cooperation –
arising from the conditions of international anarchy – in order to collectively realise positive,
absolute gains that are beyond each state’s individual reach. Neo-liberals argue that cooperation can
better promote the interests of competing actors under well-established regimes. They do not
believe the neo-realists’ claim that states will virtually always attempt to impose the least
favourable distribution of joint gains from international cooperation on their weaker partners. “The
cost of changing or constructing new regimes […] gives existing regimes some resilience to shifts
in the distribution of power.” 274
What are the predictions and hypotheses that neo-liberal institutionalism would make about the
BMD / EADS mergers? For neo-liberals, the key factor behind the EADS link-up was the process
271 Keohane (1984) p. 66
272 For a summary of the neo-realist / neo-liberal debate over the importance of relative vs. absolute gains, see Powell
(1991) pp. 334-338 and Powell (1994) pp. 1303-1320.
273 Powell (1991) p. 338
77

of European integration and the fact that a strong track-record of successfully functioning
institutions – EU, Airbus, WEU, and even NATO – allowed France, Germany, and Spain to
overcome any potential security dilemmas or distrust among them. At the same time, since Europe
and America are extremely unlikely to go to war with each other over primacy in the international
system, key players such as France and Germany have no incentive or motivation to balance against
the US by establishing EADS as a military / defence-industrial counterweight to America’s Boeing.
However, there might be good reasons in favour of the creation of EADS in terms of economic
competitiveness and industrial policy – not least because the governments concerned care about
safeguarding jobs, export earnings, and technology leadership.
When applying neo-liberalism to the BMD merger, the predictions and hypotheses are somewhat
different. First, the BMD merger – in contrast to EADS – did not involve any international
collaboration between sovereign, independent states. The US decision in favour of ethnocentric
A&D industrial consolidation is therefore seen by neo-realists as proof of serious American
concerns about potentially costly / risky relative losses in connection with transatlantic defence
collaboration – i.e., the gradual diffusion of America’s military-technological edge as a result of
inadvertent, accidental, or straightforward illegal technology transfers to potential European
partners like France and Germany as well as third countries.
On the one hand, neo-liberals may claim that the EADS merger constitutes a perfect example of
how the process of European political and economic integration facilitated an unprecedented depth
of military-industrial integration in the A&D sectors of France, Germany, and Spain. On the other
hand, however, neo-liberals would have to respond to potential neo-realist charges that even a
major institution like NATO – despite its existence since 1949 – did not manage to allay persisting
security dilemmas / distrust between America and Europe in connection with potential transatlantic
A&D mergers. In order to bolster the neo-liberals’ cause and to prove neo-realism wrong, this thesis
would have to provide relevant evidence suggesting that the BMD merger was promoted by the US
government based on a primarily economic cost / benefit analysis of potential synergies derived
from the two companies’ product portfolio, business situation, etc. If this thesis therefore supported
the notion that the BMD merger was driven primarily by economic / business factors – more than
by US geostrategic interests rooted in a neo-realist vision of the world – it would suggest that neo-
realists are wrong and neo-liberals are right.
274 Ibid., p. 342
78

It is obvious that liberal institutionalism has been much more “realist” in describing the rapid
growth of transatlantic trade and investment ties in recent decades than realism. By illustrating the
intensification of FDI, integrated production, R&D, marketing and sales between America and
Europe, the Hamilton/Quinlan study 275 cited earlier provides ample intellectual ammunition to back
up the liberal institutionalist notion that states (1) share a strong interest in cooperating
economically and that (2) the private sector has become an important shaper of international
relations in its own right. Against this backdrop, a key question at the heart of this thesis why the
A&D sector, to this day, has remained the major exception to the wider rule of ever-closer
transatlantic economic cooperation across virtually all other sectors and industries. Also, the
objective of this thesis is to compare the relative explanatory power of neo-realism and neo-liberal
institutionalism with regard to the lack as well as the existence of international cooperation during
the post-Cold War consolidation of the US and European A&D industry – exemplified by the BMD
/ EADS mergers. This thesis thus contributes to a better understanding of the potential opportunities
for and constraints on international collaboration among sovereign and independent states,
especially with regard to the strategically important A&D industry.
275 (Hamilton & Quinlan, 2004)
79

2.3 Highlighting actors’ beliefs and identities: the role of constructivist theory
“Although our analytical coordinates for gauging global politics have proven to be
inadequate for a world in rapid change, there has been remarkably little rethinking of our
categories of analysis. Instead, in the first half of the 1990s North American scholarship on
the theory of international relations was preoccupied with the issue of whether variants of
realism or liberalism offered a superior way for explaining the world. Considering the
dramatic international developments occurring during these years, many of the academic
debates look arcane to the interested bystander. For it is hard to deny that existing theories
of international relations have woefully fallen short in explaining an important revolution in
world politics.” 276
The primary theoretical basis of this thesis is an exploration of neo-realism vs. neo-liberalism to
explain the BMD and EADS mergers. To this day, these two approaches remain the dominant
schools of thought in IR theory. Since the early 1990s, however, one could also witness the
prominent rise of constructivist theory as a new, “sociological perspective on the politics of national
security”. 277 Spurred by Alexander Wendt’s seminal 1992 article “Anarchy Is what States Make of
It: The Social Construction of Power Politics” 278 , constructivist theorists began to “[focus] on the
effects that culture and identity have on national security”. In particular, they argued that “security
interests are defined by actors who respond to cultural factors”: 279
“[Constructivists concentrate] on two underattended determinants of national security
policy: the cultural-institutional context of policy on the one hand and the constructed
identity of states, governments, and other political actors. We explore these determinants
from the theoretical perspective of sociological institutionalism, with its focus on the
character of the state’s environment and on the contested nature of political identities.” 280
The post-Cold War rise of constructivism was due, in large part, to the perceived failures and
shortcomings of both neo-realism and neo-liberalism in explaining (let alone predicting) the end of
the Cold War, the demise of the Soviet Union, the appearance of new security challenges related to
ethnic conflicts, nationalism, intensifying economic competition, environmental degradation, as
well as the “perceived increases in the relevance of issues of cultural identity in international
276 Katzenstein (1996) p. xi
277 Ibid., p. 2
278 Wendt (1992)
279 Katzenstein (1996) p. 2
280 Ibid., 4
80

politics, including human rights and religion”. 281 282 Some of the empirical material analysed in this
thesis relates to actors’ beliefs, identities, and their subjective understandings of the external
political, military, and economic environments they were confronted with leading up to the BMD /
EADS mergers. Furthermore, the thesis deals with a particular post-Cold War phenomenon –
namely the lack or occurrence of cross-border integration involving U.S. and / or European A&D
mega-primes. On both counts, the inclusion of constructivism (which rose to prominence in the
very post-Cold War period that is being investigated) in this theoretical discussion is therefore
justifiable, even though the evaluation of neo-realist vs. neo-liberalist explanations certainly
remains the fundamental basis of this thesis.
As was already explained above, there are three major fault lines separating neo-realism and neo-
liberalism: 1) the meaning and implications of anarchy; 2) the problem of absolute vs. relative
gains; and 3) the tension between coordination and distribution. However, as constructivists are
eager to emphasise, the two dominant IR theories also “share a similar, underlying analytical
framework, susceptible to the same weakness”. 283 For example, neo-realism and neo-liberalism
“agree on the central importance of international anarchy for the analysis of international
politics”. 284 While neo-realists assume that states are locked into a constant battle for survival in an
anarchic, international self-help system (zero-sum game), neo-liberalists believe that international
institutions can help states overcome anarchy by clearly defining their common interests and by
coordinating their conflicting policies (thus creating a positive-sum game). According to both
theoretical approaches, the system’s anarchic structure – be it defined as competitive self-help
anarchy or as anarchy mitigated by international institutions – shapes, drives, and ultimately
determines state actions. “In this view states operate in environments that create constraints and
opportunities.” 285
Furthermore, neo-realists and neo-liberalists assume that states’ interests and their perceptions of
each other / of their respective external environments are “unproblematic” (in other words, they are
“unvarying and acontextual” 286 ). These interests and perceptions as well as the corresponding
political choices (e.g., counterbalancing, bandwagoning, cooperation, etc.) are taken for granted
because states are essentially viewed as rational, utilitarian actors that merely react and adapt to
281 Ibid., p. 7
282 “The narrow definition of security tends to focus on material capabilities and the use and control of military force by
states. This contrasts with the distinctions among military, political, economic, social, and environmental security
threats that affect not only states but also groups and individuals, as well as other nonstate actors.” Ibid., p 9
283 Katzenstein (1996) p. 13
284 Ibid., p. 11
285 Ibid., p. 23
286 (Jepperson, Wendt, & Katzenstein, 1996) p. 43
81

external stimuli / changes in the international structure. 287 Both IR theories also share a common
belief that states are unitary and functionally undifferentiated actors. In other words, each country
speaks and acts with just one voice; there is no analytical room for potential bureaucratic infighting
or internal political differences that may limit the state’s ability to pursue a rational, utilitarian
defence of its national interests. To sum things up, “the assumption of unified state actors and a
focus on an anarchic, systemic context of states are common to both [neo-realism and neo-
liberalism]”. 288
Constructivists, in contrast, believe “that security interests are defined by actors who respond to
cultural factors”. 289 In particular, national interests are “constructed” through a process of social
interaction, both at the domestic and at the international level. “[Constructivism] thus departs from
materialist notions and the rationalist view of identities as exogenously given [put forward by neo-
realist and / or neo-liberal theories]” 290
“The international and domestic societies in which states are embedded shape their
identities in powerful ways. The state is a social actor. It is embedded in social rules and
conventions that constitute its identity and the reasons for the interests that motivate
actors.” 291
Constructivists view the concept of “identity” “as a crucial link between environmental structures
and interests”. 292 At its most fundamental level, the term identity describes the “basic character” of
states. 293 294 According to constructivism, “Variation in state identity, or changes in state identity,
affect the national security interests or policies of states.” 295
“Identities both generate and shape interests. Some interests, such as mere survival and
minimal physical well-being, exist outside of specific social identities; they are relatively
287 It is telling that Peter Katzenstein – on the first page of the first chapter of the first-ever book that brought together a
broad range of constructivist authors fousing on national security issues – writes the following: “Put briefly, this book
makes problematic the state interests that pre-dominant explanations of national security [that is, neo-realism and neoliberalism]
often take for granted.” Ibid., p. 1
288 Ibid., p. 12
289 Ibid., p. 2
290 Ibid., p. 26
291 Ibid., p. 23
292 (Jepperson, Wendt, & Katzenstein, 1996) p. 59
293 Ibid., p. 33
294 Constructivists originally borrowed the term “identity” from social psychology, where it “refers to the images of
individuality and distinctiveness (‘selfhood’) held and projected by an actor and formed (and modified over time)
through relations with significant ‘others’”. Ibid., p. 59
295 Ibid., p. 60
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generic. But many national security interests depend on a particular construction of self-
identity in relation to the conceived identity of others.” 296
For example, states such as Nazi Germany, Imperial Japan, and Communist Russia in the 1930 /
1940s as well as the current regime in Iran can be defined as “revisionist powers” that are openly
challenging and defying the existing international order. Alternatively, states can also embrace a
“trading power” identity, putting a premium on the expansion of their international economic
relationships while generally eschewing the pursuit of “hard” military power. In the wake of WWII,
both West Germany and Japan adopted this particular identity and strategy very successfully. In
addition, states can also embrace a wide variety of other identities, ranging from the Jewish state
(Israel) to the world’s leader in the global war on terror (the United States in response to 9/11
during the first term of President George W. Bush, who decided to invade both Afghanistan and
Iraq) to the champion of a “multipolar world order” (France under General de Gaulle or President
Chirac). Other state identities might include leader of the non-aligned movement (India) or of
Communist world revolution (USSR). In each of these cases, distinct state identities resulted in
distinct foreign / national security policy interests and choices, thus rendering both analytical
categories “problematic” (that is, varying and contextual). 297 Hence, as Peter Katzenstein put it
succinctly, “‘Defining’, not ‘defending’, the national interest is what [constructivism] seeks to
understand.” 298
Domestically, a vast variety of actors – ranging from political leaders / parties, government
bureaucracies, and interest groups such as labour union or business associations, to the media,
religious organisations, companies, etc. – are often fiercely competing to promote their definition of
what constitutes “the national interest” and, by extension, the country’s “identity”.
“Conceiving of the state in relational terms and investigating the domestic sources of
foreign policy focuses attention on the degree to which the identities of actors are
constructed by state-society relations.” 299
“[Constructivists] […] refer to identity as a shorthand label for varying constructions of
nation- and statehood. The process of construction typically is explicitly political and pits
conflicting actors against each other.” 300
296 Ibid., p. 60
297 “The historical evidence compels us to relinquish the notion of states with unproblematic identities.” Katzenstein
(1996) p. 23
298 Ibid., p. 2
299 (Jepperson, Wendt, & Katzenstein, 1996) p. 51
300 Katzenstein (1996) p. 6
83

Especially in open, liberal democracies, this rather complex and multi-faceted process to define the
national interest is frequently messy, cumbersome, irrational, and sometimes also inconclusive. In
practice, states are therefore rarely, if ever, the kind of purely rational and utilitarian actors that neo-
realists and neo-liberalists assume they are. 301 Furthermore, states’ interests and perceptions are also
shaped by interactions with the international environment. For example, a state may feel isolated
and humiliated at the hands of other countries (i.e., Germany after the Versailles Treaty) and
therefore embrace a revisionist identity that provides a compelling political narrative and
justification to challenge the existing international order, if necessary even by military force. In this
particular example, both Germany’s national identity and its national interests were clearly shaped
by perceptions of and interactions with the external environment. However, that being said, the
German domestic political environment also played an important role in framing the country’s
national identity. For example, Germany’s pervasive economic malaise (which, in turn, was caused
by the 1929 international “crash” as well as an extremely harsh Versailles sanctions regime),
coupled with growing domestic political polarization, certainly fostered the rise of Adolf Hitler and
his Nazi regime. The rest is history. As can be seen from this example, both domestic and
international environments can and usually do have a crucially important impact on state interests
and identities. Therefore, constructivists analyse “the impact of actors on their environment and the
impact of environments on actors”. 302
“The analysis of transnational relations and of world systems offers analytical perspectives
that elucidate the relations between states and their social environments. Often the social
environments that affect state identities link international and domestic environments in a
way that defies the reification of distinct domestic and international spheres of politics.” 303
When talking about international “systems” comprising a number of states in distinct social
environments, constructivists also introduce the important analytical categories of “culture”,
“norms”, and “values”. These terms are indispensable for a precise understanding of “The Culture
of National Security” – the title of the first-ever book that brought together a broad range of
constructivist authors working on national security: 304
“[Constructivists] […] invoke the term ‘culture’ as a broad label that denotes collective
models of nation-state authority or identity, carried by custom or law. Culture refers both to
a set of evaluative standards (such as norms and values) and a set of cognitive standards
301 Even in totalitarian regimes there are often different centers of gravity within the ruling elite competing for power,
influence, and money.
302 (Jepperson, Wendt, & Katzenstein, 1996) p. 40
303 Katzenstein (1996) pp. 24-25
84

(such as rules and models) that define what social actors exist in a system, how they
operate, and how they relate to one another.” 305
“Norms are collective expectations about proper behaviour for a given identity. […] Norms
either define (‘constitute’) identities in the first place […] or prescribe or proscribe
(‘regulate’) behaviours for already constituted identities […]. Taken together, then, norms
establish expectations about who the actors will be in a particular environment and about
how these particular actors will behave.” 306
Constructivists argue that military and political alliances such as NATO or the EU have fostered the
emergence of a distinct “culture” among their respective members. Drawing on the “security
community” concept initially developed by Karl Deutsch 307 – who defined it as a group of states for
whom the use of military force against each other is virtually unthinkable – constructivist authors
like Emanuel Adler and Michael Barnett have further refined this notion by highlighting the
importance of shared identities, norms, values, and cultures for the emergence and effective
functioning of “security communities”. 308 This aspect of constructivism is of course particularly
relevant for the theoretical discussion underpinning this thesis, which analyses post-Cold War
political, economic, and military relations – characterised by both cooperation and rivalry – among
close Western NATO / EU allies through the prism of the strategically important A&D industry.
Looking specifically at the EU context, it is interesting to note that constructivists consider neo-
functionalism and regional integration theories – which emerged in the 1950s with the launch of the
European Coal and Steel Community (ECSC) and “developed sophisticated approaches to
investigating the effects of integration processes on actor properties” 309 – “as precursors of current
theoretical alternatives to neo-realism and neo-liberalism”. 310 Despite their differences in other
areas, constructivists and neo-functionalists basically do agree that the external structural
environment specific to a particular state system (for example, the EEC / EU area) can have a direct
and lasting impact on the perceptions, expectations, political orientations, and identities of the
countries involved. Having formed a system of like-minded states that share common values and
norms – and that derive tangible economic, political, or even military benefits from their
cooperation – the members of this (EEC / EU) “security community” thus essentially managed to
create a new “culture of national security”: one that overcomes traditional (neo-realist) notions of
304
Ibid.
305
Ibid., p. 6
306
(Jepperson, Wendt, & Katzenstein, 1996) p. 54
307
Deutsch (1957)
308
See (Adler & Barnett, 1998)
309
(Jepperson, Wendt, & Katzenstein, 1996) p. 44
310 Ibid., p. 44
85

inter-state rivalry by substituting trust for distrust and by focusing actors’ interests / concerns away
from zero-sum competition and towards positive-sum cooperation.
That being said, the emergence of different systems of states – each characterised by distinct
(security) cultures, identities, and interests – does also raise the spectre of rather conflictual “us vs.
them” scenarios. For example, at the military level, the launch of the NATO security community
was motivated by a desire to contain the aggressive and expansionist policies of the Soviet Union
and its Communist proxies. At the economic level, the process of European integration – while
initially viewed as a mechanism to overcome centuries of bloody Franco-German conflict – has in
recent decades acquired a new dimension: namely to make sure that the EU punches at its weight in
international fora (especially trade negotiations, etc.) – something that is most effectively achieved
by channelling collective EU member interests and representing them with one voice. Looking at
EU-US relations and specifically at the strategic A&D sector, these confrontational “us vs. them”
notions have been featured most prominently in the fierce Airbus vs. Boeing dogfight. It is telling to
note that at various points in the 1990s, both the United States and Europe had the perception that
their aerospace industries were under serious competitive attack from the other side, threatening to
cause a decline over the long-term. As Peter Katzenstein put it, “Definitions of identity that
distinguish between self and other imply definitions of threat and interest that have strong effects on
311 312
national security policies”.
With regard to this thesis, constructivist theory is helpful to the extent that it draws our attention to
the importance of states’ identities and perceptions when defining or re-defining their national
interests. For example, the end of the Cold War and the demise of the Soviet Union caused many
Western European nations to redefine their perception of and hence their relationship with the
United States. While Washington was previously viewed, above all, as the leader of NATO and the
ultimate guarantor of stability and deterrence vis-à-vis the Warsaw Pact, that Cold-War era
geopolitical “glue” weakened substantially beginning in the early 1990s, giving rise to a more
competitive notion of transatlantic relations, especially in the realm of economics and trade, but
also in the area of foreign policy and defence matters. In other words: to the extent that the Soviet
threat subsided / disappeared, Western European nations were simply far less dependent on the
United States / NATO to ensure their national security through nuclear and conventional military
deterrence. Due to the end of the Cold War, the “identity” of the NATO alliance thus changed
considerably, at least for the Western European nations who were far less fearful of a Russian
311 Katzenstein (1996) pp. 18-19
86

esurgence than the newly-liberated former Eastern European Warsaw Pact members (many of
whom were eager to join NATO in order to secure US protection guarantees vis-à-vis Moscow).
As was already indicated above, constructivist theory is also a useful tool to analyse the emergence
of regional integration and their corresponding intra-regional identities, especially in the EU
context. Constructivists believe that external systemic changes in the global economy – that is,
“deep” international economic integration through FDI, trade, and inter-connected capital markets –
leads to shifts in the nature of the state actors involved (that is, their “constructed” interests,
identities, etc.) which, in turn, can result in a new (regional) national security environment / culture:
“The theoretical argument that regional economic integration helps promote peaceful
security relationships is certainly very compelling. It is critical to recognise that it is the
actual experience of deep economic integration – and not merely forming a group – that
leads to the processes scholars highlight as beneficial for improved security ties. […]
[T]he most successful regional economic integration scheme in the twentieth century – the
European Economic Community / European Union – was consolidated in the presence of a
common external security threat.” 313
Constructivist authors like Stephen Brooks argue that “the global economy can influence security
by changing capabilities, incentives, and the nature of actors”. 314 At the capabilities level, the
“globalisation of production” – defined by the rise of MNCs built around a vast FDI network of
internationally dispersed production facilities – has made it increasingly difficult for countries to
pursue a “go-it-alone” approach to the development and manufacturing of advanced weapons
systems:
“[T]he scales have shifted decisively against a strategy of autarkic defence production: no
state, including the great powers, can now effectively remain on the cutting edge in military
technology if it does not pursue significant internationalisation in the production of
weaponry.” 315
A state is therefore left with two basic options. First, if a country wants to have access to state-of-
the-art weapons systems it needs to embrace globalisation and, in particular, accept the
corresponding dependencies / vulnerabilities vis-à-vis foreign technologies, suppliers, etc. From a
312 In this context, constructivists also explicitly draw on Carl Schmitt, who argued that friend / foe categories are at the
heart of any political relationship.
313 Brooks (2005) p. 52
314 Ibid., pp. 5-6
315 Ibid., p. 6
87

neo-mercantilist perspective, of course, this approach raises the spectre of “foreign influence,
foreign control, and foreign domination” 316 in the strategically important A&D industry. Second,
any country that instead decides to rely on autarkic weapons production “will not have leading-edge
military equipment and will thus be in a weaker position to pursue revisionist aims”. 317 Either way,
Stephen Brooks argues that the globalisation of (defence) production is bound to promote more
peaceful great power relations by (1) creating structural international military / technological
dependencies that make it much more difficult and costly for countries to go to war (something that
would severely disrupt existing international supply chains, trigger embargoes, etc.) or by (2)
leaving autarkic (revisionist) states with inferior weapons technologies, thus making them
potentially easier to subdue by countervailing international coalitions. 318
At the incentives level, Brooks points out that “the globalisation of production has greatly lowered
the economic benefits of conquest in the most economically advanced states, and hence among all
of the current and future great powers”. 319 Vastly increased international dependencies – based on
the cross-border movement of goods (trade), capital (FDI), and people – as well as the shift from a
resource-based to a knowledge-based economy have made it much more difficult for revisionist
powers to extract significant economic benefits from conquered territories. After all, any military
occupation will almost inevitably disrupt existing inter-state and intra-firm (MNC) trade and FDI
relationships with other countries. While the aggressor would gain physical control over the
production facilities located in the occupied territory, the globalisation of production essentially
“means that conquering an advanced country may only result in possession of a portion of the
320 321
value-added chain, perhaps a very small portion”.
Finally, Stephen Brooks argues that the “globalisation of production” can impact security relations
by fostering the emergence of regional economic integration. In particular, geographically dispersed
MNCs are viewed as the key driver of regional cooperation, as countries that enjoy close bilateral /
multilateral trade and FDI ties have generally strong incentives to pursue closer economic and
316
Moran (1990) p. 58
317
Brooks (2005) p. 11
318
See Brooks Ibid., pp. 10-11
319
Ibid., p. 10
320
Ibid., p. 61
321
Brooks develops a set of specific hypotheses to explain why the globalisation of production has reduced the
economic benefits of military conquest in the most advanced economies: “1. A vanquished advanced country is unlikely
to attract significant FDI following conquest, and its firms are unlikely to be able to form or sustain extensive
international interfirm alliances. 2. In the most advanced states, the ability of a conqueror to extract economic resources
is likely to be much lower than in the past because production and technological development are now less concentrated
geographically. 3. Conquerors are likely to pursue economic centralisation, especially in a vanquished knowledge-based
economy.” Ibid., p. 70. For an in-depth theoretical discussion of how the globalisation of production and the shift to
knowledge-based economies impacts the economic benefits of military conquest, see Ibid., pp. 57-71.
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political coordination at the governmental level. At first glance, this line of reasoning is similar to
neo-functionalism and its projected “spill-over” effects from “low politics” to “high politics”
already outlined earlier in this chapter. Brooks, however, pays particular attention to how the
external environment (‘globalisation of production”) reshapes security relations by changing “the
nature of the actors”. This last notion – which one could also refer to as the changing of the
respective state “identities” – is a key element of constructivist IR theory.
Constructivists also readily embrace the notion – first laid out by neo-realist author Stephen Walt in
“The Origins of Alliances” 322 – that states balance against threats, not simply against power. The
question of why states B or C are viewed as specific threats in a given external environment – and
how this threat perception is “constructed” internally based on state A’s identity / national security
culture – goes to the heart of the constructivist approach to IR theory. As Peter Katzenstein reminds
us, “‘Defining’, not ‘defending’, the national interest is what [constructivism] seeks to
understand.” 323 In other words, why do certain states view each other as “friends” or “allies” while
other states perceive each other as “rivals” or even “enemies”? While neo-realists put a premium on
balance-of-power considerations to explain these different inter-state political dynamics,
constructivists, in contrast, emphasise the role played by individual state identities as well as norms
and values in terms of constructing a certain “culture” fostering cooperative or confrontational
international security relations.
The fact that some of the empirical material analysed in this thesis relates to actors’ beliefs,
identities, and their subjective understandings of the external political, military, and economic
environments they were confronted with leading up to the BMD / EADS mergers justifies the
inclusion of constructivism as a separate IR theory subchapter. That being said, however, the
primary theoretical basis of the entire thesis remains an exploration of neo-realism vs. neo-
liberalism. In essence, the BMD / EADS case studies suggest that transatlantic rivalries over the
political, military, economic, and technological power and prestige derived from the A&D industry
do exist even among close Western NATO allies. The thesis concludes that the two mergers can
best be explained by the fact that realist arguments prevailed over liberal-institutionalist arguments
among policymakers and business leaders in the countries involved, especially in Washington and
Paris. With the A&D industry caught between two very different worlds – realism and national
security vs. liberalism, cooperation, globalisation and open markets – political leaders and business
executives in the United States and Europe put a premium on the former, thus reinforcing the notion
322 See Walt (1987)
323 Katzenstein (1996) p. 2
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that this strategic industry sector remains of tremendous importance for a nation’s military and geo-
economic security.
While the ethnocentric BMD merger and the regiocentric EADS merger represent two diametrically
opposite A&D consolidation strategies, this thesis argues that both transactions were ultimately
driven by a similar mix of realist national security and neo-mercantilist ambitions: that is, on the
one hand, US concerns about defending American military and economic hegemony in the post-
Cold War world vis-à-vis all countries (including close NATO allies like Germany, France, and
even the UK); and, on the other hand, European concerns about counter-balancing by creating an
internationally competitive A&D “European champion” that would also be able to serve as the
defence industrial foundation for a viable ESDP autonomous from NATO and the United States. In
contrast, transatlantic defence industrial M&As at the prime contractor level – something that
proponents of neo-liberalism would normally have expected in a globalised economy – did not
materialise.
In essence, this thesis analyses intra-Alliance relations during the post-Cold War period through the
prism of the strategically important A&D industry. The lack of full-scale transatlantic mergers and
acquisitions involving major US and European A&D companies is interpreted as a sign of the
(continuing) appeal of neo-realist thinking and associated relative gains considerations among US
policymakers (especially on Capitol Hill and in certain parts of the Clinton administration, like the
State Department). On the European side, too, neo-realist forces are seen as the key (political)
drivers of the Franco-German-led creation of EADS. For sure, at first glance, one might be tempted
to interpret the unprecedented level of deep, transnational A&D industrial integration between AM,
Dasa, and CASA as an indication that neo-liberalism is best positioned to explain this merger.
Rather, however, the case study research undertaken for this PhD thesis suggests that it was neo-
realist counter-balancing considerations vis-à-vis the American hegemon driving French, German,
and Spanish political as well as business leaders to support the creation of EADS. The corporate
executives involved, of course, were primarily concerned with gaining the necessary economies of
scale to successfully compete with US rivals like Boeing.
While constructivism can be a useful analytical tool, especially when it comes to matters of regional
economic and political integration, the “problem” with the application of this theory in the context
of this particular PhD thesis is that the interests and motivations underpinning the BMD / EADS
mergers involve intra-Alliance relations shaped by different “cultures of national security” both
within and between the respective NATO and EU frameworks. In other words, France and
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Germany have not only a bilateral “security culture” but also an EU-specific “security culture” as
well as a NATO-specific “security culture” – with only the latter directly involving the United
States. The fact that France and Germany are part of the same NATO military alliance as the US
while, at the same time, they form the engine of another regional bloc (the EU) that has repeatedly
clashed with the United States on a range of political as well as economic and trade matters
(including the crucial A&D sector via the Airbus-Boeing rivalry) makes it extremely difficult (if not
impossible) to disaggregate the different norms, values, and identities that constructivists believe
have shaped the development (and post-Cold War evolution) of national interests / threat
perceptions within distinct NATO and EU “security cultures”.
During the Cold War, the NATO security culture was clearly paramount since close military ties to
Washington were seen as indispensable for deterring the Warsaw Pact. After the demise of the
Soviet Union, however, one could witness that the EU began to develop a quite robust security
culture of its own (especially in the context of ESDP and the stated desire for military autonomy
from NATO / the United States). Of course, these two observations are rather obvious and
straightforward. However, placing constructivism at the theoretical heart of the BMD / EADS
mergers narrative – which involves an analysis of political, economic, and military motivations on
both sides of the Atlantic – would require a disaggregation of the interests and identities of a wide
range of actors (governments, corporate leaders, Congress, etc.) in different countries across an
extended period of time. And even then, constructivism’s ultimate analytical “value-added” for the
purpose of this thesis is rather questionable. Especially in the realm of foreign, security, and
defence policy, national governments are the ultimate deciders. For example, while individual US
mega-primes might have been, in principle, in favour of closer transatlantic defence industrial ties,
the nature of the US political system is such that the corporate leaders concerned knew full well that
such a deal would meet insurmountable opposition on Capitol Hill – the very political institution
that is ultimately in charge of appropriating and approving the Pentagon’s lucrative procurement
budget. In this particular context, the rather dominant ability of national governments to shape the
A&D industry (derived from, inter alia, monopsonic market power and their role as the key
regulator of this strategic sector) leaves constructivists with little analytical wiggle room to
challenge neo-realist and neo-liberal assumptions regarding the essentially unitary and functionally
undifferentiated nature of sovereign states.
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2.4 PhD thesis methodology: the case for case studies
Qualitative research “is an effort to understand situations in their uniqueness as part of a
particular context and the interactions there. This understanding is an end in itself, so that it
is not attempting to predict what may happen in the future necessarily, but to understand the
nature of that setting – what it means for participants to be in that setting, what their lives are
like, what’s going on for them, what their meanings are, what the world looks like in that
particular setting. […] The analysis strives for depth of understanding.” 324
The point of departure for every PhD thesis is an initial research question – some kind of observed
phenomenon that triggers a researcher’s interest and desire to conduct an in-depth analysis to
explain the dynamics of the issue at hand. The initial research questions for this thesis can be
formulated as follows: (1) Why did the Americans consolidate their A&D industry at a purely
national level, with virtually no involvement from other Western allies? (2) Why did the French,
Germans, and Spaniards decide to merge their leading national A&D companies into EADS? 325 In
an effort to guide (social) scientists in their methodological choices, Yin also developed the
following overview of major research strategies and their usefulness / applicability to different
research questions and contextual settings:
strategy form of research
question
requires control over
behavioural events?
experiment how, why yes yes
survey who, what, where, how
many, how much
archival analysis who, what, where, how
many, how much
no yes
no yes / no
history how, why no no
case study how, why no yes
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focuses on
contemporary events?
As Robert Yin points out, “In general, case studies are the preferred strategy when ‘how’ and ‘why’
questions are being posed, when the investigator has little control over events, and when the focus
in on a contemporary phenomenon within some real-life context”. 326 After the core research
questions have been defined, the next key step is the case selection process. According to Kathleen
Eisenhardt, “it makes sense to choose cases such as extreme situations and polar types in which the
324 Patton (1985) p. 1
325 When case studies are used, a clear formulation of the key research questions is particularly important. As
Eisenhardt cautions, “Without a research focus, it is easy to become overwhelmed by the volume of data”. Eisenhardt
(1989) p. 536

process of interest is ‘transparently observable’”. 327 The BMD and EADS case selection for this
PhD thesis was specifically guided by Eisenhardt’s methodological recommendation.
This thesis uses two case studies – the BMD and EADS mergers – to test the relevant explanative
power of two major IR theories, neo-realism and neo-liberalism. A case study can be defined as “a
research strategy which focuses on understanding the dynamics present within single settings”. 328
329 330 Given the focus on two unique and singular events, case studies were deemed to be the best
and most appropriate (if not only suitable) methodological approach for the analysis of the BMD
and EADS mergers. In general, case studies can be used for several purposes: (1) to provide
description; (2) to test theory; and (3) to generate theory. 331 332 This particular thesis leverages the
case study approach to accomplish the first two of these objectives. After all, while describing and
analysing a given phenomenon, a case study can, at the same time, test those theories that offer
alternative explanations of the facts under review.
The BMD case was selected for several reasons. First, it is the biggest-ever A&D industry merger,
combining the world’s largest commercial aircraft manufacturer (Boeing) with the world’s largest
military aircraft manufacturer (MDC). Second, both before and after the BMD merger, Boeing has
been ranking as the single biggest U.S. industrial exporter, thus underscoring the company’s critical
economic importance from a neo-mercantilist perspective. Third, the BMD merger touched directly
on the fierce transatlantic rivalry between Boeing and Airbus for supremacy on the global civil
aerospace market. For this reason, the BMD merger became the subject of an acrimonious and
controversial anti-trust review process, pitting the Washington’s FTC against the EC in Brussels.
Finally, the fact that top political leaders on both sides of the Atlantic decided to get personally
involved in the BMD anti-trust review process, at times even threatening a U.S.-EU trade war if
their demands were not met, demonstrates the unique strategic and economic importance of this
particular A&D merger and justifies its selection as the first PhD case study.
326 Yin (1994) p. 1
327 Eisenhardt (1989) p. 537
328 Ibid., p. 534
329 “The case study is an intensive description and analysis of a phenomenon or social unit such as an individual, group,
institution, or community. The case is a bounded, integrated system […]. By concentrating upon a single phenomenon
or entity (the case), this approach seeks to describe the phenomenon in depth.” Merriam (2002) p. 8
330 “As a research strategy, the distinguishing characteristic of the case study is that it attempts to examine: (a) a
contemporary phenomenon in its real-life context, especially when (b) the boundaries between phenomenon and context
are not clearly evident.” Yin (1981) p. 59
331 See Eisenhardt (1989) p. 535
332 See Yin (1981) p. 59
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In contrast, the 1994 LMC merger – while leading to the creation of the world’s largest defence
company – was not selected as a separate case study in view of LMC’s much smaller export
revenues, the absence of a corresponding zero-sum transatlantic rivalry à la Airbus vs. Boeing, and
the fact that the LMC merger was not the subject of a high-stakes political and regulatory battle
involving senior government leaders from the United States and Europe. The other major M&A
transactions during America’s post-Cold War A&D industrial consolidation process leading to the
creation of mega-primes such as NGC, GD, or Raytheon did not represent appropriate case studies
either since each of the companies concerned had even less (transatlantic) strategic, economic, and
political weight than the BMD merger.
In comparison, the explanation for the selection of EADS as the second merger study is rather
straightforward. After all, the creation of EADS marked the first (and so far only) time that several
different, sovereign countries decided to merge the crown jewels of their respective A&D industrial
base into one fully integrated company. The unique (quantitative and qualitative) characteristics of
the EADS merger – that is, large-scale pan-European consolidation in the strategically important
A&D sector – justify its inclusion as a separate case study. While the 1992 Franco-German creation
of Eurocopter – through the combination of the rotorcraft divisions of Aérospatiale and DASA –
represented “the first time that aeronautics companies from different European countries combined
R&D and production capabilities”, 333 the end result was a much smaller and much more limited
case of pan-European defence consolidation than the EADS merger.
Furthermore, the launch of EADS – which consolidated the combined 80-percent Airbus ownership
interest of three of the four industry partners (AM, DASA, and CASA) into one corporate entity –
also facilitated the subsequent transformation of the rather loose and cumbersome Airbus GIE
consortium into a “normal” company (today organized as “Airbus SAS” under French law). Due to
this crucial transnational corporate consolidation / streamlining process, first within EADS and then
within Airbus, the leading European civil airplane manufacturer would subsequently be in a much
better position to decisively break Boeing’s dominance on the world’s large commercial aircraft
(LCA) market. Given Boeing’s long-time position as the single most important American industrial
exporter, the EADS merger therefore affected core U.S. strategic and commercial interests.
The EADS merger was also selected as a case study because it is – first and foremost – a Franco-
German transaction. Given France’s long-time desire to pursue an independent foreign and security
policy, coupled with selective counter-balancing against the American hegemon, the EADS merger
333 GAO (1994) p. 6
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thus promises particularly useful insights into the political and geo-strategic implications /
motivations of paneuropean A&D industrial restructuring during the post-Cold War era. In other
words, the BMD and EADS case studies are “extreme situations” / “polar types” as they cover both
an ethnocentric merger backed by the U.S. hegemon (BMD) and a regiocentric merger (EADS)
fostered by a French government that saw this transaction as a conditio sine qua non for the launch
of an effective ESDP independent of NATO and the United States.
Apart from the two “big” BMD / EADS case studies, this thesis also includes three smaller cases
which are used to contrast large-scale transatlantic M&As in a wide range of industries (automotive,
banking, and telecommunications) with the absence of major transatlantic mergers in the A&D
sector. All three cases involved successful 334 acquisitions of American firms by European (German)
companies and were carefully selected to serve as counterfactuals for the ethnocentric BMD
merger, which this thesis interprets as an attempt by the American hegemon to consolidate and
defend its dominant military, economic, and technological status vis-à-vis all potential challengers,
including NATO allies like France, Germany, and Spain – the EADS founding nations.
The methodological rationale for including these three counterfactual case studies in this PhD thesis
is to highlight those factors that separate the ethnocentric American BMD merger in the
strategically important A&D sector from large-scale transatlantic M&A transactions in non-
strategic or less-strategic industries. That being said, at least two of the three European companies
involved – Deutsche Bank (DB) and Deutsche Telekom (DT) – were able to overcome significant
political opposition and / or regulatory hurdles to successfully take-over their respective U.S.
acquisition targets. In the case of DT, U.S. resistance to the VoiceStream (VS) purchase was first
and foremost based on national security / foreign eavesdropping concerns in the
telecommunications industry, which forms an integral part of the country’s critical infrastructure.
However, given strong free-trade backing by the Clinton administration and influential Senators on
Capitol Hill, the rather sensitive DT-VS deal was ultimately approved, thus further underscoring the
special status of the A&D sector as the strategic industry par excellence.
The next key step in case study research is the collection of qualitative and quantitative data,
leveraging a variety of methods and sources. As Eisenhardt points out:
334 The term “successful” means that these transactions received shareholder approval and were not blocked by
Washington. It does not imply that these acquisitions were successful from a financial or corporate strategy point of
view.
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“Of special note is the combination of qualitative with quantitative evidence. Although the
terms ‘qualitative’ and ‘case study’ are often used interchangeably […], case study
335 336
research can involve qualitative data only, quantitative only, or both.”
This particular thesis relies above all on qualitative data, even though quantitative data are also
used, for example to analyse and compare relevant corporate statistics such as annual turnover,
operating income / profit margins, per-unit-costs of aircraft, break-down of total sales by divisions
and geographic markets, the number of employees, etc. Virtually all of these quantitative data are
derived from the respective companies’ Annual Reports and other legal documents like SEC filings,
etc. In addition, quantitative research is also based on defence / military procurement spending
figures compiled by the IISS “Military Balance” series as well as other (official) statistics.
However, it is important to emphasise that these quantitative data were used for illustrative or
comparative thesis purposes only; but not as “data fodder” in mathematical models to “prove”
certain hypotheses or theories. That being said, much relevant quantitative and especially
qualitative data regarding the A&D industry and its impact on transatlantic security and defence
relations was also collected from news articles and analytical pieces published by major newspapers
(“Washington Post”, “Financial Times”, “New York Times”, etc.), the specialised A&D industry
press (“Aviation Week & Space Technology”, etc.), and leading IR journals (“International
Security”, “International Organization”, Survival, “Foreign Affairs”, “Foreign Policy”, etc.), as well
as reports issued by influential think tanks (CSIS, Brookings, RAND, IISS, SIPRI, etc.) and
relevant governmental institutions (European Commission, DoD, MoD, etc.).
Last but not least, crucial qualitative research insights for this thesis were also generated through a
variety of semi-structured interviews with relevant U.S. and European A&D executives, former
government officials, think tank experts, academics, journalists, etc. These interviews were
conducted for two key reasons: (1) to double-check previously gathered information contained, for
example, in newspaper articles, think tank reports, etc.; and (2) to fill gaps in the existing body of
publicly available literature. Given the sensitive, national security-related nature of the A&D
industry, the “gap-filling” function of these interviews was of paramount importance for the
completion of this PhD. As Eisenhardt points out, case study researchers “typically combine
multiple data collection methods” including interviews, observations, and archival sources, which
335 Eisenhardt (1989) p. 538
336 In this context, Robert Yin draws particular attention to the fact that there is “frequent confusion regarding types of
evidence (e.g., qualitative data), types of data collection methods (e.g., ethnography), and research strategies (e.g., case
studies)”. Yin (1981) p. 58.
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are particularly common. 337 As a result, this “triangulation made possible by multiple data
collection methods provides stronger substantiation of constructs and hypotheses”. 338
In fact, a number of insights generated by this thesis – especially those relating to the U.S.
government’s position vis-à-vis transatlantic defence industrial cooperation – were not clearly
spelled out in the existing, publicly available literature. In this context, my interviews with former
senior Clinton administration officials – including former Deputy Defense Secretary John Hamre;
Paul Kaminski, former US Under Secretary of Defense for Acquisition and Technology, and
Jacques Gansler, former US Under Secretary of Defense for Acquisition, Technology and Logistics
– proved to be particularly valuable. Access to these high-level interview partners was made easier
because (1) I could leverage personal introductions / referrals from people we knew in common;
and (2) because my interviewees were all political appointees who had already left government and
were thus in a position to speak their mind more freely. Personal referrals and recommendations are
invaluable as they help establish the trust necessary to conduct frank, meaningful interviews. In
addition, once an interview is successfully completed, that person might provide an introduction to
another potential interviewee who would normally be either “out of reach” (like Airbus CEO Dr.
Tom Enders) or not even known to me.
That being said, of course, not all information gathered during these as well as my other interviews
was on-the-record. In fact, virtually none of my interviewees would have felt comfortable having
our conversations recorded. Therefore, I took hand-written notes during the interviews to capture
key messages and relevant quotes (which generally had to be authorised prior to their inclusion in
my thesis). Typically, my interviews would take in the office or personal home of the person
concerned and would last somewhere between 60 and 75 minutes. For each interview, I prepared a
list of about ten to twelve key questions that I wanted to ask for sure. Depending on how the
interview went, I would then adapt my question structure to take the conversation into a new
direction to gather additional insights, cross-reference information derived from previous
interviews, etc. 339 In that sense, it is important to be flexible, open-minded, and opportunistic about
337 Ibid., p. 537
338 Ibid., p. 538
339 “Overlapping data analysis with data collection not only gives the researcher a head start in analysis but, more
importantly, allows researchers to take advantage of flexible data collection. Indeed, a key feature of theory-building
case research is the freedom to make adjustments during the data collection process. These adjustments can be the
addition of cases to probe particular themes which emerge. […] Additional adjustments can be made to data collection
instruments, such as the addition of questions to an interview protocol or questions to a questionnaire […]. These
adjustments allow the researcher to probe emergent themes or to take advantage of special opportunities which may be
present in a given situation.” Ibid., p. 539. This opportunistic approach to data collection is of course applicable to both
theory-building and theory-testing research.
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these interviews, primarily to identify – as Defense Secretary Donald Rumsfeld famously put it –
“unknown unknowns”. 340
As was already pointed out earlier, case study research generally involves the collection and
analysis of large amounts of information required to reach the necessary intellectual depth to test or
even build theories. In doing so, researchers have to walk a fine line between the “ever-present
danger of ‘death by data asphyxation’” 341 and the necessity “to become intimately familiar with
each case as a stand-alone entity”. 342 At a minimum, every case study should be based on a detailed
write-up that describes the context, characteristics, and particular dynamics of the issues under
review. As Eisenhardt puts it, “These write-ups are often simply pure description, but they are
central to the generation of insights”. 343 By looking at a certain questions from a variety of angles,
using different methods of data collection, case study researchers increase the probability that they
generate new insights that previously might simply have been overlooked.
In this context, however, it is also important to reflect on the inherent methodological limitations of
the case study / interview technique in particular, and of qualitative research in general. First of all,
the fact that only a certain number of people can generally be interviewed (both because of time and
space restrictions as well as because not everybody who would be a relevant interview partner is
actually available for such a conversation) means that the data collection efforts are by definition
limited. In other words, what about those people who were not interviewed and who might have
given a rather different account of the A&D mergers under review? After all, there is always the
risk that the researcher, either consciously or unconsciously, focuses precisely on those
interviewees that tend to confirm his preconceived notions about the particular issue that is being
analysed. By the same token, interview partners who offer to provide referrals to relevant
colleagues and peers (“I think you should definitely talk to so and so…”) might inadvertently steer
one to the very people who already share their perceptions and / or points of view. While these
additional interviewees might thus all “fit the picture” and provide information that dovetails nicely
with the previously gathered insights, the researcher involved does of course run the risk of
pursuing a self-fulfilling research design; one that delivers just one side of the story.
340 During a press briefing on 12 February 2002, then-Defense Secretary Donald Rumsfeld made the following
statement: “There are known knowns; there are things we know that we know. There are known unknowns; that is to
say, there are things that we now know we don’t know. But there are also unknown unknowns; there are things we do
not know we don’t know.”
341 Eisenhardt (1989) p. 540
342 The term “death by data asphyxation” was first coined by Andrew Pettigrew in a 1988 paper presented to the
National Science Foundation. See Ibid., p. 540
343 Eisenhardt (1989) p. 540
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Finally, this methodological section also reflects on the nature of proof and the use of evidence in
qualitative research. In contrast to quantitative research techniques, which essentially rely on
mathematical formulas and statistical modelling to establish theories and / or to verify hypotheses,
qualitative research designs are focused on the description and ultimately subjective interpretation
of the characteristics and particular dynamics of the question under review.
“The key to understanding qualitative research lies with the idea that meaning is socially
constructed by individuals in interaction with their world. The world, or reality, is not the
fixed, single, agreed upon, or measurable phenomenon that it is assumed to be in positivist,
quantitative research. Instead, there are multiple constructions and interpretations of reality
that are in flux and that change over time. Qualitative researchers are interested in
understanding what those interpretations are at a particular point in time and in a particular
context.” 344
Given these inherent methodological limitations, qualitative research therefore cannot really
provide the same type of clear-cut scientific “proof” that one would expect from quantitative
research / data analysis based on mathematical formulas and statistical modelling, let alone
experiments in the natural sciences. Rather, as was already pointed out above, the nature of proof
and the use of evidence in qualitative research are virtually always based on a subjective
interpretation of the issues under review. For example, as Robert Yin points out with regard to
“case study attempts to explain a phenomenon” 345 (i.e., why did the Americans consolidate their
A&D industry at a purely national level, with virtually no involvement from other Western allies,
while the French, Germans, and Spaniards decided to merge their leading national A&D companies
into EADS?):
“An explanatory case study consists of: (a) an accurate rendition of the facts of the case, (b)
some consideration of alternative explanations of these facts, and (c) a conclusion based on
the single explanation that appears most congruent with the facts.” 346
As point (b) indicates, qualitative (explanatory) case study research is generally based on the notion
that a given phenomenon can be potentially accounted for by a variety of explanations. First of all,
this state of affairs is due to the fact that qualitative case study researchers need to make decisions
about (1) what types of evidence to consider, and (2) about how much relative weight / importance
to assign to the different collected data. In fact, given the ever-present threat of “death by data-
asphyxation”, case study researchers are under constant pressure to reduce complexity by limiting
344 Merriam (2002) pp. 3-4
345 Yin (1981) p. 61
346 Ibid., p. 61
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the type and / or the amount of evidence admitted in their analysis. It is this very kind of necessary
and deliberate reduction in complexity that inevitably leads to “multiple constructions […] of
reality” 347 in the case study write-up / narrative. In other words, different researchers working
independently on the same case study topic are likely to arrive at different descriptions and
appreciations of the issues under review.
However, it is not only the data collection and reality construction processes that are subjectively
influenced by the respective researcher’s individual perceptions, experiences, biases, and
preferences. In addition, and very importantly, there are also “multiple […] interpretations [that is,
explanations] of reality”. 348 Ultimately, the one interpretation that a researcher settles on to account for
a given phenomenon is the “conclusion based on the single explanation that appears most congruent
with the facts”. 349 In his excellent foreword to Robert Yin’s influential book titled “Case Study
Research: Design and Methods”, Donald Campbell refers to this reasoning / elimination process as
the “plausibility-reduction of rival hypotheses”:
“More and more I have come to the conclusion that the core of the scientific method is not
experimentation per se but the strategy connoted by the phrase ‘plausible rival hypotheses’.
This strategy may start its puzzle-solving with ‘evidence’ or it may start with ‘hypothesis’.
Rather than presenting this hypothesis or evidence in the context-independent manner of
positivistic ‘confirmation’ (or even postpositivistic ‘corroboration’), it is presented instead
in extended networks of implications that (while never complete) are nonetheless crucial to
its scientific evaluation.
This strategy includes […] seeking out rival explanations of the focal evidence and
examining their plausibility. The plausibility of these rivals is usually reduced by
‘ramification extinction’, that is, by looking at their implications on other data sets and
seeing how well these fit.” 350
The decision about which explanation / hypothesis / theory fits the case most is of course rather
subjective and might at times even be perceived as arbitrary, especially when it comes to singular
event case studies like the BMD and the EADS merger which cannot be replicated. In this context,
Yin compares the research and reasoning process involved to a crime investigation conducted by a
detective:
347 Merriam (2002) pp. 3-4
348 Ibid., pp. 3-4
349 Yin (1981) p. 61
350 Foreword by Donald T. Campbell in: Yin (1994) p. ix
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“There are no fixed recipes for building or comparing explanations. An analogous situation
may be found in doing detective work, where a detective must construct an explanation for a
crime. […] Presented with the scene of a crime, its description, and possible reports from
eyewitnesses, the detective must constantly make decisions regarding the relevance of various
data. Some facts of the case will turn out to be unrelated to the crime; other clues must be
recognized as such and pursued vigorously. The adequate explanation for the crime then be-
comes a plausible rendition of a motive, opportunity, and method that more fully accounts for
the facts than do alternative explanations.” 351
Applied to an academic setting, the goal of the researcher (detective) is thus to convince his relevant
peers (the judge or jury) that his interpretation of the phenomenon is the most appropriate and the
most congruent with the facts. Of course, in contrast to the legal burden of proof – usually defined
as “beyond reasonable doubt” as required by the prosecution in most criminal cases within an
adversarial system – the corresponding academic level of proof does not generally live up to the
same standard. After all, given the traditional academic freedom of research, scientists are
essentially free to chose their own “jury of peers” and often do so by associating themselves with a
certain “school of thought” comprised of fellow academics that share similar core beliefs and
assumptions about their discipline. In other words, the acceptable levels and types of (qualitative)
proof in one academic community might differ significantly from the analogous standards in other
communities.
“The degree of certainty or consensus that the scientific community is able to achieve will
usually be less in out-of-doors social science, due to the lesser degree of plausibility-
reduction of rival hypotheses that is likely to be achieved. The inability to replicate at will
(and with variations to rule out specific rivals) is part of the problem. We should use those
singular event case studies (which can never be replicated) to their fullest, but we should
also be alert for opportunities to do intentionally replicated case studies.” 352
Furthermore, as was pointed out earlier, qualitative research involves “multiple constructions and
interpretations of reality that are in flux and that change over time”. 353 This clear reference to the
dynamic nature of qualitative research is very important, because it further refines the
corresponding methodological discussion of the nature of proof and the use of evidence.
Constructions and interpretations of reality are in flux and can change over time for several reasons.
First, researchers might discover new data (possibly by using new data collection methods).
Second, researchers might discard previously used data because of concerns about their relevance,
351 Yin (1981) p. 61
352 Foreword by Donald T. Campbell in: Yin (1994) p. x
353 Merriam (2002) pp. 3-4
101

validity, etc. Third, researchers might change the relative weight and importance of the different
variables under consideration in a given situation. Fourth, researchers might develop a new theory
to better explain a phenomenon. In qualitative case study research, this kind of theory building /
theory improvement is often achieved as a result of cross-case analysis. As Yin puts it:
“The craft of detective work again provides an analogous example. Assume that a detective
has already produced a tentative explanation for a single crime (within-case analysis). Now
the detective is confronted with another case, where the relevant conditions appear to be
similar to those of the first case, and where the detective may be able to use the first
explanation and establish that both crimes were committed by the same person. Modification
may be necessary in applying the explanation to the second case, and the detective must learn
to ignore irrelevant variations from case to case. How the detective carries out this work in
(a) constructing an adequate explanation for each case singly, and (b) knowing the
acceptable levels of modification in the original explanation as new cases are encountered,
may be considered analogous to what confronts the researcher in doing cross-case
analysis.” 354
Given these constraints, “proof” in qualitative research is thus much more tenuous compared to the
findings in quantitative research. Therefore, a qualitative researcher is well advised to refrain from
making any sweeping statements claiming, for example, that his research “proves” a certain theory
right or that it “demonstrates” that there is a clear, causal relationship between factors A and B, etc.
Rather, a qualitative researcher should phrase his findings much more carefully, for example by
saying that the interpretation of the currently available data (and data collection methods)
“suggests” that a certain theory is most appropriate to explain a particular phenomenon, or that
there “appears” to be a causal relationship between A and B. Such a cautious approach is not only
in line with the nature of proof and the use of evidence in qualitative research, it also demonstrates
that this method of academic inquiry takes nothing for granted and that the quest for new and better
insights continues unabatedly.
354 Yin (1981) p. 63
102

Chapter 3: The Boeing / McDonnell Douglas Merger
3.1 Scaling back: the post-Cold War downturn in military spending
The purpose of this chapter is three-fold. First, it describes the post-Cold War downturn in US
military spending and its effect on the A&D industry. Second, this chapter analyses the efforts by
the US government to promote national A&D industry consolidation, especially at the prime
contractor level. Finally, it provides an overview of Boeing and MDC at the time of their 1997
merger. Building on this chapter and incorporating additional research, chapter 5 will then provide
an in-depth analysis of the different political and economic forces behind the BMD merger.
US defence spending reached a peak at 6.5 percent of GDP in the mid-1980s – during President
Reagan’s massive arms build-up – and dropped sharply after the end of the Cold War. 355 During the
1986-1989 period, overall US defence spending peaked at an average of US$356 billion per year. 356
The trough in military spending was reached during 1996-1997, when Washington had reduced the
Pentagon budget by more than US$100 billion to US$254 billion (3.3 percent of GDP). 357 This
dramatic decline in US military spending also triggered an unprecedented consolidation in the
American A&D industry. “The defence industry is more concentrated today than at any time in
more than half a century”. 358 Between 1990 and 1998, the number of US prime contractors
“declined in 10 of the 12 markets DoD identified as important to national security” 359 . The biggest
reductions occurred in the aerospace industry, namely in the areas of tactical missiles (2 contractors
in 1998 vs. 13 in 1990), fixed-wing aircraft (2 vs. 8), expendable launch vehicles (2 vs. 6), and
satellites (5 vs. 8). US defence industry consolidation was less pronounced in other sectors, such as
surface ships (5 vs. 8 contractors), tactical wheeled vehicles (4 vs. 6), tracked combat vehicles (2 vs.
3), strategic missiles (2 vs. 3), torpedoes (2 vs. 3) or rotary wing aircraft (3 vs. 4). 360 Between 1990
and 2002, the number of prime contractors in the US A&D industry came down from 18 to five so-
called mega-primes: Boeing, the world’s biggest A&D company; LMC, the world’s biggest defence
firm; Raytheon, the world’s biggest missile manufacturer; NGC, a diversified defence conglomerate
manufacturing reconnaissance aircraft, submarines, aircaft carriers, etc.; and diversified A&D
conglomerate General Dynamics (GD). See Annex Table 5 for more details.
355 (Gholz & Sapolsky, 1999/2000) p. 15. All figures are in constant 1996 US dollars.
356 Ibid., p. 15
357 Morrocco (1991)
358 GAO (1998) p. 1
359 Ibid., p. 2
360 Ibid., pp. 6-7
103

“The [US defence] industrial base inherited from the Cold War included significant excess capacity
that was purposely maintained to meet national security requirements” 361 . After the end of the Cold
War, the US government strongly encouraged America’s defence companies to consolidate
production facilities and cut excess capacity through M&As to achieve the economies of scale and
cost savings necessary to remain competitive and financially viable. The sharp reduction in defence
spending following the Reagan-era military build-up – during which the number of US defence
contractor employees had jumped from 1.7 million in 1976 to 3.3 million in 1986 – proved to be a
serious shock with far-reaching repercussions:
“More than two million defence workers, military personnel, and civil servants […] lost
their jobs. Thousands of firms […] left the industry. More than one hundred military bases
[…] closed, and the production of weapons is down considerably.” 362
A historical analysis of US military procurement and R&D expenditures between 1948 and 1998
reveals clear boom and bust patterns. 363 364 These cycles track closely the shifts in relative military
threat perceptions over time. During WWII, US defence spending peaked in 1944/1945 at US$753
billion (39.3 percent of GDP). 365 After WWII, the US demobilised at record speed and made drastic
defence budget cuts. Military spending increased again sharply with the beginning of the Cold War
in the late 1940s – reaching US$316 billion (14.5 percent of GDP) in 1953 366 – and then dropped
significantly after the end of the Korean War that same year. American defence expenditures
continued to decline (small hikes notwithstanding) until the early 1960s, when rising superpower
tensions over Cuba and Vietnam triggered massive investments in military (missile and space)
technology programs. In 1968, US defence spending reached US$358 billion (9.6 percent of
GDP). 367 Subsequently, defence expenditures declined again until the late 1970s, when the 1979
Soviet invasion of Afghanistan and President Reagan’s election in 1980 triggered a major boost in
US military spending. At the height of Reagan’s aggressive efforts to push the “Evil Empire” over
the brink and into the dust bin of history (through SDI 368 and other initiatives), total US defence
spending reached 6.5 percent of GDP in 1986. Despite sharp increases in the Pentagon budget
following the 9-11 attacks, current annual American military expenditures – projected to reach
US$708 billion in FY2011 369 including operations in Iraq and Afghanistan – amount to only about
361 Oden (1999) p. 75
362 (Gholz & Sapolsky, 1999/2000) p. 5
363 Ibid., pp. 7-8
364 (Cooling & Gropman, 2005) pp. 1-10
365 (Gholz & Sapolsky, 1999/2000) p. 15
366 Ibid., p. 15
367 Ibid., p. 15
368 SDI = Strategic Defence Initiative
369 FY = fiscal year
104

4.7 percent of GDP. Yet even at these comparatively low levels of relative military spending,
America still spends more on its national defence than the next twenty countries combined.
During the three Cold War military boom cycles (Korea, Vietnam, Reagan-era), privately-owned
American A&D companies heavily expanded their production and R&D capacities to respond to
rising government demand. During the ensuing bust cycles, however, these firms cut less capacity
than they had previously built up. 370
“Even at the Cold War low points, outlays for R&D and defence procurement were
sufficient to keep the defence industry focused on military rather than commercial markets
[…]. During the cyclical downturns, the government closed the [government-owned]
arsenals, shifting more business to private sector contractors, who were more politically
influential than the managers and employees of the public facilities.” 371
Defence procurement is a highly political business, driven both by external threat perceptions and
domestic lobbying efforts (targeted primarily at the legislative branch) led by the defence industry.
Talking about lobbying, it is important to recognize that “the right to petition the government for
redress of grievances” is enshrined in the US Constitution’s First Amendment. In the case of
Senators and Congressmen, lobbying is not only the process through which special interest actors
(i.e., trade associations, unions, companies) make their voices heard, but also how the elected
officials on Capitol Hill interact with their constituents. That being said, legislative lobbying efforts
by corporate actors related to defence procurement are often both particularly sensitive and
effective as they involve millions if not billions of dollars worth of business with direct
repercussions on jobs and capital investments for voters back home.
In America, the crucial importance of money and the weakness of the party system have forced
Members of Congress to constantly raise new funds and to run for re-election as the defender of his
home district, its companies and their workers. The configuration of America’s political system has
therefore provided lobbyists and industry associations much greater influence in Congress than in
the finance-limited and party-controlled parliamentary systems of Europe. Furthermore, the
separation of powers has enabled Congress repeatedly to block or delay administration preferences
with regard to US defence acquisition programmes. In the late 1980s, then-Defense Secretary
Cheney tried to “kill” the V-22 Osprey tiltrotor aircraft after the projected development costs had
skyrocketed from US$2.5 billion to US$30 billion. He was overruled by Congress, where
370 (Gholz & Sapolsky, 1999/2000) p. 7
371 Ibid., pp. 7-8
105

influential Members were determined to keep this multi-billion dollar procurement programme and
the associated jobs in their home districts alive.
“After more than two decades and $16.4 billion, the history of the V-22 is a sorry tale of
cost overruns, shoddy construction, and managerial incompetence. Thirty people have died
in four Osprey crashes, making the V-22 one of the killingest experimental planes ever. The
program has teetered on the brink of elimination since almost the beginning. But it never
went away, propped up by genuine need, pork barrel politics, and the hope that the money
already spent wasn’t money wasted.” 372
In June 2009 – two months after US Defense Secretary Gates had called for the termination of the
F-22 program by FY2011 (capping production at 187 aircraft) in favour of the F-35 Joint Strike
Fighter (JSF) – the House and Senate Armed Services Committees allocated an additional
US$368.1 million and US$1.75 billion, respectively, to the Pentagon defence authorisation bill to
procure more F-22s and keep the production lines “hot.” President Obama, who decried this
additional F-22 funding as an “inexcusable waste of money” 373 , threatened to veto his own defence
budget and launched a Congressional lobbying campaign to ensure that his government’s defence
procurement priorities prevail on Capitol Hill. The Obama administration’s massive push-back
succeeded and in July 2009, the Senate voted 58-40 to defeat the F-22 funding amendment. “This is
the first case in recent years when Congress, the defence industry and the dissident voices in the
military haven’t been able to prevail in a contest with a Defense secretary over the fate of a
weapons program”. 374 375 However, there is also a more intriguing interpretation of the F-22
episode:
“Why is it that the Obama administration, the defence industry, and Congress have all lined
up against the F-22 – a plane with known costs and capabilities – in favour of a plane that
may cost more and offer less? Why isn’t Lockheed pushing to repeal the export ban on the
F-22? For that matter, why did Lockheed stop lobbying the Hill for continued production of
the F-22 once the Gates budget came out? And why did Lockheed request that Boeing – the
junior partner on the F-22, responsible for about a third of the aircraft’s production – cease
its own lobbying campaign on behalf of the aircraft? There is one obvious explanation for
all of this: The military-industrial complex stands to make a lot more money off the F-35
than it could from the F-22. And Boeing is not a Lockheed partner on the F-35. So once the
372 Berler (2005) p. 1 (online)
373 Cole (2009)
374 Ibid.
106

F-22 production line closes, Boeing will be out of the fighter business entirely, leaving
Lockheed the US government’s only supplier of fighter aircraft.” 376
As lobbyist Jed Babbin – a former Pentagon official in the George H.W. Bush administration –
summed up his work on Capitol Hill: “Money meant access, and access meant influence. Political
campaign contributions were the currency of access.” 377 The offering or solicitation of campaign
contributions in exchange for a Member’s specific legislative action (i.e., to support or defeat a
certain bill, etc.) certainly constitutes corruption and is illegal. That being said, it is clear that
Senators and Congressmen do pay close attention to the needs and concerns of major (defence)
firms located in their districts and will often steer procurement business to them. Defence lobbyists
are especially eager to cultivate close ties with the chairmen and ranking members of relevant
committees such as Armed Services or Appropriations in an effort to advance specific procurement
projects. In a legislative branch operating on the principle of seniority, these key members are “Old
Bulls” with “decades of service and around whom had grown a hard shell of power and influence.
378 379
And money.”
A&D companies have a long history of over-promising and under-delivering when it comes to the
procurement of new defence systems. 380 “The US defence procurement system has effectively
become a liar’s contest in terms of projected costs, risk, performance, and delivery schedules.” 381
One lobbying scandal erupted in 1982, when the GAO 382 determined that officials from the US Air
Force (USAF) and the OSD (Office of the Secretary of Defense) along with representatives from
Lockheed and other defence (sub-)contractors made “an extensive and cooperative effort […] to
influence [House Members] and later the House and Senate conferees, on the proposed US$10
billion procurement of the C-5B “Galaxy” strategic lift aircraft” 383 . The lobbying campaign was
triggered by opposition to the programme in the Senate and the House, both of which had voted
375
The dissident military voices were the USAF Chief of Staff and the Commander of Air Combat Command. Goldfarb
(2009)
376
Ibid.
377
Babbin (2006) p. 28
378
Ibid., p. 28
379
“With every re-election, a congressman or senator gains power among his peers, the press, and the lobbying
community. The support of a ten-term congressman means infinitely more than that of a freshman because his influence
over other members is that much greater. A six-term senator’s word carries more weight, proportionate to his time in
Washington, than a newcomer’s. Security in office is not just prestige. It is power, and with each passing election, the
Old Bulls’ horns grow longer.” Ibid., p. 30
380
“At the individual programme level, a military service typically establishes and DoD approves a business case
containing requirements that are not fully understood and cost and schedule estimates that are based on optimistic
assumptions rather than on sufficient knowledge. This makes it impossible to successfully execute the programme
within established cost, schedule, and performance targets.” GAO (April 2009) p. 5
381
(Cordesman & Kaeser, 2008) p. 1
382
GAO = General Accounting Office / Government Accountability Office (renamed since 7 July 2004)
383 GAO (1982) p. 1
107

against the Pentagon’s C-5B procurement authorization and instead “authorized the procurement of
new and used commercial wide-body cargo aircraft” to meet military airlift needs – thus favouring
rival Boeing. The lobbying effort – which involved lobbyists working for Lockheed and relevant
sub-contractors – was “initiated, organized, and directed” 384 by senior Pentagon officials and the
GAO established that “material, but undeterminable, amounts of appropriated and Government
resources were [illegally] spent for the purpose of influencing this procurement authorization
measure” 385 .
The end of the Cold War fundamentally changed the West’s defence and security environment.
With the Warsaw Pact and the Soviet Union gone, much of the US and European defence
industries’ “economic distinctiveness” vanished as well: 386
“[T]he defence industry has to an extent lost its singular character among manufacturing
industries of having to attend mainly to very special technical requirements specified by
military demand without a compelling attention to the costs incurred” 387 .
As a result of this post-Cold War “normalisation”, US and European defence companies could no
longer automatically rely on lucrative “cost-plus” procurement contracts to obtain specified and
guaranteed profits irrespective of their own corporate cost structure. Furthermore, it became
increasingly difficult for companies with military and civilian operations to use relatively steady
profits from the defence side to cross-subsidise R&DP for commercial applications. “Such financial
spill-over – in effect, cross-subsidy – has for a long time probably been much more significant than
the technology spill-over from defence-related to civilian industrial activities.” 388 It is important to
emphasise this link in the defence / civil aerospace relationship since Boeing’s desire to balance its
cyclical commercial aircraft business with MDC’s less cyclical military aircraft division was a
crucial driver behind the BMD merger. EADS, in contrast, is at a competitive disadvantage since
the European company derives most of its turnover and profits from the commercial (Airbus)
division.
384 Ibid., p. 9
385 Ibid., p. 1
386 van Scherpenberg (1997) p. 101
387 Ibid., p. 102
388 Ibid., p. 101
108

3.2 Corporate strategies to deal with the post-Cold War downturn in defence spending
A&D companies could choose among different strategies to cope with the sharp post-Cold War
downturn and the related military “procurement holiday”. The first corporate strategy was one of
“market exit” 389 : companies divested of defence operations to concentrate on their core civilian
business units. In the US, a number of diversified industrial companies like General Electric (GE),
Ford, and General Motors (GM) made that choice. 390 The second corporate strategy aimed at
“achieving greater economies of scale and scope” 391 , namely through horizontal and vertical
mergers with other defence companies, as well as the acquisition of defence operations from those
companies seeking to exit the market. Consolidation through M&As also promised access to new
markets and additional clout when negotiating with suppliers or government procurement
agencies. 392 The third corporate strategy, dubbed “integration with civilian industry” 393 , aimed at
leveraging potential synergies between defence and civilian operations. In particular, companies
were trying to identify spin-on and spin-off possibilities by increasing the use of civilian or dual-use
technologies and production processes in their defence equipment and / or by deriving commercial
applications from defence-related products. This last strategy promised to allow defence companies
to weather the “procurement holiday” by (partly) reversing the direction of the long-standing cross-
subsidisation from defence to commercial products. The end of the Cold War created hyped
expectations for a swift conversion of the defence industry from military to commercial
applications. The Clinton administration launched a multi-billion dollar Technology Reinvestment
Programme (TRP) to support the conversion and diversification efforts of US A&D companies.
However, despite a high degree of integration and overlap between the commercial and military
sectors within the aerospace industry – the technology base, much of the supplier base, and the
skills and processes used were essentially common – virtually all of the post-Cold War defence
conversion experiments failed as defence companies found it very difficult to adapt from the
demands of slow-moving bureaucratic government procurement to the fast-paced, intense
competitive pressures of the private sector. While defence companies relied on “cost-plus” contracts
389 van Scherpenberg (1997) pp. 102-104
390 Many of these firms had initially entered the defence electronics business after the 1973 Arab-Israeli war. Shocked
by the fact that the Egyptians had used Soviet-made missiles to down about 100 American-made Israeli fighter jets, US
industry leaders came to realise “that the shell of the plane or ship was less important than the technology inside” – thus
leading credence to the notion that rapidly growing IT and computer capabilities were transforming the industry,
making planes and weapons systems ever more complex and expensive. “Almost overnight, the defence electronics
industry was born […] and some of the biggest names in corporate America rushed to get into the game.” Ultimately,
however, many of these big, diversified companies “underestimated the financial, technological, and political risks
involved. And one by one, all decided to exit the business and sell out”. Pearlstein (1996)
391 van Scherpenberg (1997) p. 102
392 “In those cases where the creation of ‘national champions’ has been the declared aim of an industrial policy driven
by the ‘love of scale’, disregarding economies of scope, even the cost advantages of scale may not be achieved”. van
Scherpenberg (1997) p. 102
393 Ibid., p. 102
109

that put a premium on high performance and state-of-the-art technology (with little or no regard to
the costs and R&D / production lead times / delays involved), they suddenly had to deal with an
environment in which cost and timely delivery of products were crucial factors in winning and
retaining customers. Ultimately, defence conversion efforts were often a disappointment since the
profound differences between doing business with the government and doing business with the
private sector proved too difficult to overcome.
While A&D companies frequently pursued a combination of the three strategic options outlined
above, they often also tried a fourth option to compensate for the loss of US defence spending:
“gaining new export markets abroad”. Conversion and diversification efforts became less and less
relevant as A&D companies began pushing hard to find new customers abroad. During the Cold
War, advanced US weapons sales were often driven by political and military-strategic
considerations, notably to support allied governments against the Soviet Union and its proxies. 394
395 396 After the Cold War, economic factors began to play a much bigger role in the review of arms
exports permits. 397 398 In America, defence contractors successfully lobbied the Clinton
administration to relax export restrictions by arguing that crucial yet expensive production lines and
technological expertise could only be kept “hot” by producing for markets abroad. However, apart
394 American companies lobbied hard for defence sales to Europe (e.g., the 1975 “sale of the century”) even when
successive US governments were trying to promote a transatlantic “two-way street” to encourage the European allies to
spend more on military procurement through gaining a greater share in its production.
395 “[F]rom the early 1960s to the late 1980s, the global arms traffic was largely governed by the competitive practices
of Washington and Moscow. [...] In their pursuit of Third World allies, the superpowers concentrated their arms-supply
activities in a number of major areas considered pivotal to the global correlation of forces – most notably the Middle
East, South Asia, and East Asia. As a result, the bulk of the weapons transferred internationally during this period was
delivered to a number of key states in each of these regions, including Algeria, Egypt, Ethiopia, India, Iran, Iraq, Israel,
Libya, Pakistan, Saudi Arabia, Syria, Taiwan, Turkey, and the two Koreas. Together, these key states (along with
favoured allies Cuba and Vietnam) accounted for some three-quarters of all arms transfers during this period. In seeking
to maintain their friendly ties with these states, moreover, the superpowers provided them with major combat systems –
tanks, fighter planes, missiles, and so forth – of increasing sophistication, thus generating the high dollar values for
global arms transfers in the late 1970s and the 1980s.” […] US and Soviet arms accounted for 65 percent of the total
worldwide weapons traffic in 1972-1988 (when measured in dollars), while those provided by all NATO and Warsaw
Pact countries combined accounted for about 90 percent of the traffic during this period.” Klare (1996) pp. 857-858;
857
396 The Cold War paradigm of arms trafficking can be summarised as follows: “(1) the overwhelming dominance of the
two superpowers (and their respective allies) over the global arms flow; (2) the primacy of ideological and geopolitical
factors in determining the recipients of arms; (3) the emergence and acceleration of regional arms rivalries in key Third
World areas; and (4) a preference, on the part of leading recipients, for transfers of sophisticated front-line combat
systems.” Ibid., p. 858
397 The post-Cold War paradigm of arms trafficking can be summarised as follows: “(1) the unrivalled dominance of the
[US] in the global arms traffic; (2) the primacy of economic (as against ideological and geopolitical) motives for arms
exports; (3) the emergence of new arms rivalries in East Asia and the expansion of existing markets in a number of
other areas; (4) a focus on internal (as against external) defence in the selection of arms by many states; (5) the growing
salience in the arms trade of sectarian militias, insurgent groups, black-market dealers, and other non-state actors.”
Ibid., p. 859
398 “During the Cold War, the [US] did not consider that arms sales contributed to defence industry viability and placed
little emphasis on the domestic impact of export decisions. From 1990, however, Washington began to attach greater
importance to the economic value of defence exports. In February 1995, a presidential directive made strengthening the
domestic defence industry one of the five main goals of US conventional-arms-transfer policy.” Grant (1997) p. 113
110

from potentially aggravating military tensions around the world, liberal arms export policies also
increase the risk that Western weapons technologies fall into the hands of hostile regimes or
terrorists and could be used for attacks against America and its allies. This post-Cold War “US
export offensive” 399 also put American A&D companies in fierce competition with their European
counterparts, prompting senior French officials to accuse Washington of trying to “eliminate”
Europe’s defence industrial base. 400
America’s status as the sole post-Cold War superpower provided its A&D companies with geo-
strategic and technological advantages over their European competitors. First, geo-strategically
speaking – given America’s global preponderance – third countries in Eastern Europe Asia, etc.
would often prefer to buy US over European weapons in an effort to cement ties with Washington
and to gain “the implicit sympathetic [US] involvement in [their] security affairs that usually goes
with such contracts” 401 . In contrast to the 800-pound American super gorilla, “the EU countries […]
[were] obviously still lacking an important, often decisive selling point of any major arms exporter:
the ability credibly to project military power and provide security cover beyond their immediate
sphere of influence” 402 . 403 BAe / BAE Systems’s Al-Yamamah contracts – first brokered between
the UK and Saudi governments in 1985 with follow-on arrangements in 1988 and 2006 – is
probably the only example of a European company striking a multi-billion dollar defence deal with
a major non-European US ally. 404 405 Second, technologically speaking, US weapons systems were
399 van Scherpenberg (1997) p. 104
400 “Europeans have felt disadvantaged by this heightened competition with the US over weapons exports, because of
the far larger domestic base from which US companies operate and a perceived undervaluation of the dollar. The US
export drive fuelled European feelings, above all in France, that the US was deliberately attempting to ‘eliminate’
Europe's defence-industrial base.” Grant (1997) p. 114. The “elimination” charge was made by Yves Sillard, France’s
defence acquisition chief during 1989-1993.
401 van Scherpenberg (1997) p. 105
402 Ibid., p. 105
403 During 1987-1990, Washington and Paris accounted for 21 and 6 percent, respectively, of all global arms transfers to
Third World countries (totalling US$190 billion in constant 1994 dollars). During 1991-1994, the two countries
captured 48 and 21 percent, respectively, of that same market segment (totalling US$106 billion). US exports increased
from US$40.8 billion to US$50.7 billion during these time periods whereas France nearly doubled its exports from
US$11.9 billion to US$22.4 billion. The UK’s export share dropped from 15 percent during 1987-1990 to 5 percent
during 1991-1994. Germany increased its share from 2 to 3 percent. Klare (1996) p. 861. French arms appealed
especially to those countries looking for an alternative to US weapons. “There is a sound reason for keeping a healthy,
if somewhat inferior, European defence industry producing locally designed goods. For example, [Washington] clearly
wishes to wean the Egyptians away from Soviet arms, but cannot (or will not) provide them with large numbers of
sophisticated aircraft. It is desirable, in that case, that they buy Jaguars and Mirage, which will have a lesser impact on
Israel air superiority.” Cohen (1978) p. 89
404 The Al-Yamamah 1 and 2 contracts totalled GBP42 billion. The Al-Yamamah 3 contract totalled GBP10 billion.
Gribben (2006)
405 Saudi Arabia decided not to buy military hardware from America for fear that pro-Israel Members of Congress
would either block such a defence deal or would impose significant usage restrictions on any exported US aircraft. The
Reagan administration supported the Al-Yamamah deals as they strengthened the Saudi military at a time of rising Gulf
tensions and allowed Prime Minister Thatcher to secure the country’s biggest export contract ever. Hoewever, in the
run-up to the 2006 Al-Yamamah 3 Eurofighter deal, there was lots of competition by US and French companies trying
to sell planes to Riyadh. “BAE and the [UK] Government have been accommodating [the Saudis], helping to fight off
competition from American and French rivals wanting to dip into the Saudi defence honey pot. They have benefited
111

often more advanced than those of their European competitors, and therefore also more appealing to
potential buyers. 406 “[F]or the [US], technological superiority is a conditio sine qua non of its
military strategy” 407 . From a geo-strategic and technological perspective, “the Persian Gulf War [of
1991] was great advertising for US weapons” 408 .
from a regime anxious to avoid becoming too dependent on American suppliers and technology and risk being hit by an
Israeli-influenced embargo as well as a fruitful 20-year [Saudi-UK defence] relationship.” Ibid.
406 “Nations that seek the latest in military technology – and that possess the necessary funds or credits – have tended to
acquire US weapons whenever possible.” Klare (1996) p. 862
407 van Scherpenberg (1997) p. 106
408 Pearlstein (1991)
112

3.3 “The Last Supper”: how the US government promoted and constrained aerospace and
defence industry consolidation in the United States
President Clinton was elected at a time of wide-spread unease and doubts about America’s
industrial and technological competitiveness. In the 1980s, the US had experienced huge budget
deficits, massive job losses and a steep decline in the dollar. In the early 1990s, Japan and a re-
unified Germany were expected to translate their (“soft”) industrial and technological power into
(“hard”) political and military power. Therefore, US political pundits and public opinion feared a
decline in America’s relative international economic as well as politico-military power position as
an emboldened Japan and Germany were no longer limited by the constraints of the Cold War order
and decided to pursue independent national foreign and security policies. In response to these
perceived challenges, Bill Clinton and his team – probably more than any other administration in
US history – put a heavy emphasis on economic security when defining their country’s national
security strategy. In his 1993 “Report on The Bottom-Up Review: Forces For A New Era”, then-
Defense Secretary Les Aspin even argues that the “armed forces […] can play a significant role in
[addressing] economic dangers to our national security”. 409 “Linking military dominance with an
aggressive pursuit of economic interest has since become a core element of the US economic policy
agenda.” 410
Starting in 1993, the Clinton administration began a systematic push for greater consolidation in the
American A&D industry. Given sharply reduced defence budgets, the overriding challenge for US
policymakers was to ensure that military contractors remained active in all key weapons areas –
both to produce current systems and to develop new ones. While the Bush Senior administration
embraced “laissez-faire economics” and was opposed to any direct government actions to promote
consolidation in the US A&D industrial base, the Clinton administration decided to change course
soon after taking office. On 22 July 1993, US Defense Secretary Les Aspin invited 15 CEOs from
America’s leading A&D companies for dinner to discuss the Pentagon’s plans for greater industry
consolidation with Deputy Defence Secretary Bill Perry and Under Secretary for Technology and
Acquisition John Deutch. Perry underlined the Pentagon’s concerns about the massive
overcapacities plaguing the US defence industry. After the end of the Cold War, the Pentagon could
409 “The final – and in the post-Cold War period, perhaps most important – set of dangers that US strategy must
confront is economic. In recent years, the U.S. economy has been plagued by an enormous and growing federal debt,
sluggish growth, inadequate job creation, and a large trade imbalance. Further, our growing dependence on imported
petroleum constitutes an economic danger of its own. The [Pentagon] can help address these economic dangers. DoD
can help America seize the opportunity presented by the end of the Cold War to enhance its economic security. We
must stress the productive reinvestment of defence resources, facilities, and technology into the civilian economy.
Placing new emphasis on key technologies – information and manufacturing technologies and advanced materials – will
help strengthen both the military and civilian sectors.” DoD (1993)
410 van Scherpenberg (1997) p. 108
113

no longer afford to maintain several independent defence manufacturers for each major weapons
platform. Perry and Deutch “[made] it abundantly clear the [DoD] was not going to solve industry’s
overcapacity problem – that would be up to those in the audience”. 411 However, Perry and Deutch
assured the CEOs that “the DoD would strongly support industry consolidation and approve
financial arrangements that benefited companies as long as they also significantly benefited the
government”. 412
The day before, Deutch spelled out the Pentagon’s pro-consolidation merger strategy to “[promote]
the rational downsizing of the defence industry” 413 . A&D companies were now allowed to include
the restructuring costs (plant modifications, equipment relocation, severance pay and retraining
costs) 414 incurred as a result of M&As in the reimbursable cost base of their cost-plus contracts –
provided that the consolidation process created long-term net procurement savings for the
Pentagon. 415 416 The Deutch memo was a direct response to lobbying pressures exerted by the CEOs
of Martin Marietta, Lockheed, Loral and Hughes on Defense Secretary Perry. 417 Otherwise, they
argued, their companies would not be able to reap the rewards of post-merger integration savings
since profits would remain constant given the fixed-price-contract nature of the defence business.
LMC Chairman Norman Augustine claimed in 1994 that his company would not have made its
acquisitions without DoD merger aid. 418 By reimbursing the defence companies for part of their
merger costs, the Pentagon aimed to create a win-win situation where corporate players are
financially encouraged to generate synergies and savings through M&A transactions which would,
in turn, benefit US taxpayers in the form of lower procurement spending (“more bang for the
buck”). The “DoD provided significant direct and indirect subsidies to merging companies, an
action that accelerated the merger and consolidation movement [during 1993-1996]” 419 .
The Pentagon’s pro-merger policy was also sharply criticised. First, as Larry Korb pointed out,
“like Mark Twain’s death, the decline of the defence industry in this country has been greatly
exaggerated” 420 . Inflation-adjusted annual US defence spending in the mid-1990s was still about
US$30 billion higher than in 1975. Using 1985, the height of the Reagan arms build-up as the
411
Augustine (2006)
412
Ibid.
413
Quoted in Korb (1996)
414
Oden (1999) p. 81
415
Defence contractors often sign cost-plus contracts with the government: the MoD reimburses the R&DP costs for
weapons systems (which can vary significantly due to long development and production cycles and are therefore not
fixed ahead of time to protect companies against excessive commercial risks) plus a fixed profit for the contractors.
416
The merger subsidies did not apply to “fixed-price” contracts.
417 Korb (1996)
418 Mintz (1994)
419 Oden (1999) p. 81
114

aseline year, clearly distorted the relative fluctuations of American defence spending over time.
The bottom-line? “Defence is still a profitable business.” 421 Second, taxpayer money should not be
used to subsidise M&A transactions. Defence companies need to decide for themselves whether any
given deal makes good business sense or not. Third, market forces, not Pentagon bureaucrats should
determine the shape of the US defence industry. “While government shouldn’t discourage
restructuring, it should stay at arm’s length.” 422 Fourth, previous defence mergers did not yield the
claimed procurement savings for the Pentagon. 423 In fact, Deutch’s memo allowed defence
contractors to bill the Pentagon in advance for projected future cost savings; a risky strategy given
the uncertainties of the defence business. Finally, the Pentagon’s merger aid also sparked a backlash
on Capitol Hill, where several Congressmen from those districts that lost jobs as a result of the
DoD-promoted defence consolidation process convinced the House to pass a bill in early March
1997 prohibiting the Pentagon to treat restructuring costs in connection with defence M&As as
allowable costs in (“cost-plus”) defence contracts. 424 The Senate, however, failed to follow suit and
the provision did not become law. 425
John Deutch defended his pro-merger memo by arguing (1) that it merely “clarified” existing US
laws and regulations and did not depart from previous government policy; (2) that the memo would
be indispensable to allow for the consolidation and rationalisation of the American A&D industry;
and (3) that it would ultimately save American taxpayers billions of dollars due to lower Pentagon
acquisition costs. 426 Interestingly, Deutch did not discuss his memo with the US military or
Congress, which only found out about it nine months later when Martin Marietta attempted to re-
coup US$60 million of the US$200 million it had paid for GD’s space division from the
Pentagon. 427 Even strong supporters of the Deutch memo, including the Aerospace Industries
Association, considered it a departure from existing government policy and were pushing the
Pentagon to formally announce the policy change in the US Federal Register. Secretary Perry later
conceded that the Pentagon should have received a green light from Congress before implementing
the new policy. 428
420 Korb (1996)
421 Ibid.
422 Ibid.
423 Neither the GAO nor the DoD could verify Hughes Aircraft’s claim that the acquisition of GD’s missile division
saved the Pentagon US$600 million. Ibid.
424 Mintz (1994)
425 Ibid.
426 Oden (1999)
427 Korb (1996)
428 Ibid.
115

The fact that there are no official figures reflecting the total cost of the Pentagon’s consolidation-
related subsidies to US defence companies during 1993-1996 raises red flags for those concerned
about the non-transparent, behind-the-scenes power and influence exerted by the military-industrial
complex. Korb estimates that LMC alone obtained US$1 billion in DoD merger support. By mid-
1996, the Pentagon had received about 30 aid requests from merging defence companies. 429 Based
on Korb’s US$1 billion LMC price tag, Oden estimates that the total amount of Pentagon merger
aid could be in the US$3 billion to US$5 billion range. 430 US defence companies also received
government export subsidies worth between US$5 billion to US$7 billion annually 431 ; a move
which helped America regain its position as the world’s leading arms exporters in 1996. In contrast,
the Pentagon paid only US$643 million to defence companies during 1993-1995 as part of the TRP
dual-use technology development effort. 432
The Clinton administration’s merger strategy boiled down to the “Noah’s Ark approach to
industrial policy: two makers of everything the [DoD] needs.” 433 434 However, while the massive
US defence consolidation in the 1990s led to a drastic reduction in the number of prime contractors,
overall defence industrial capacity remained almost unchanged. 435 “The most obvious interpretation
of this murky process is that the DoD’s main concern is keeping capacity in weapons production
and design.” 436 By fostering the creation of mega-primes, the US government made it possible for
these often highly diversified companies to keep less profitable production lines “hot” through
cross-subsidisation from more lucrative defence / business units.
“There are, therefore, strong reasons to believe that maintaining production and
development capability was more important than cost savings in prompting the permissive
[US] government stance towards mergers.” 437
Realist security concerns and corporate lobbying efforts targeted at Members of Congress eager to
save A&D jobs in their districts thus trumped liberal economic concerns about realising potential
cost-savings. However, the massive consolidation of the US A&D industry resulting in a few mega-
429 Ibid.
430 Oden (1999) p. 81
431 Ibid., p. 84.
432 Potomac Institute for Policy Studies (2004)
433 (Crock, Schine, & Borrus, 1996)
434 In support of their “Noah’s Ark” approach, Pentagon leaders pointed to the US aircraft engine market, where GE and
P&W fiercely competed for DoD contracts. Gansler (2006) p. 12
435 LMC manufactures F-22s in Georgia and F-35s in Texas. Boeing still has production facilities in Washington,
Missouri, and California. Gansler (2006) p. 15. On the political and economic impediments to the consolidation and
conversion of the defence industry, see (Gholz & Sapolsky, 1999/2000).
436 Oden (1999) p. 84
437 Ibid., p. 85
116

primes also raised alarm, especially among those managing the Pentagon’s procurement budget and
the DoJ 438 / FTC 439 anti-trust watchers. In 1997, the Clinton administration abandoned its pro-
merger policy to maintain a certain degree of competition and to prevent the creation of harmful
monopolies. The potential shift of market power from buyers (governments) to sellers (A&D
companies) is a major public policy risk associated with large-scale industry consolidation leading
to duo- or monopolies. Specifically, defence experts feared that “the West could end up with a
small set of very large, very powerful, and not very competitive defence firms, favouring the
maintenance of Cold War thinking and technologies.” 440 This quote is an explicit acknowledgment
of the A&D sector’s significant political influence vis-à-vis their respective national
governments. 441
Neither monopolies nor duopolies are generally conducive to fostering technological breakthroughs
as the dominant companies are often reluctant to embrace radical change for fear of losing their
existing government contracts. The industry structure most prone to technological innovation is
characterised by two incumbents and a well-financed “challenger” that forces the established
players to remain on the edge. 442 An industry structure with many small players is not advisable
either as R&D subsidies are spread too thin among too many companies, each of which is lacking
the necessary “critical mass” to achieve major technological breakthroughs. 443
A key question is how the gains derived from A&D industry consolidation are divided between
taxpayers (through cheaper, more capable weapons) and shareholders (through higher profits). One
of the main arguments in favour of defence mergers is that they create efficiencies that will
ultimately benefit the consumer, i.e. the government. This is the same yardstick applied by
American anti-trust law, which puts the interests of consumers above those of producers by
allowing for the creation of very efficient companies, even at the expense of reducing competition.
US anti-trust officials have generally taken a benign view of mergers that drive out weaker and less
competitive firms, provided that the efficiency gains ultimately benefit the customers. In principle,
mergers are only blocked if they cause a “substantial lessening of competition” allowing the
merging firms or post-merger market participants to exercise “market power” (either unilaterally or
438 DoJ = Department of Justice
439 FTC = Federal Trade Commission
440 (Markusen & Costigan, 1999) p. 29
441 “During the Cold War, the high level of perceived threat placed a premium on military expertise, which checked the
contractors’ political influence. Now, without the Soviet threat, contractors have too much influence over defence
procurement decisions” (Gholz & Sapolsky, 1999/2000) pp. 16
442 Pearlstein (1997)
443 Ibid.
117

in coordination with each other) to increase prices; lower product quantity, quality or service levels,
or to reduce technological innovation in the relevant product and / or geographical markets. 444
The objective of EU “competition policy” is to establish “a system ensuring that competition in the
internal market is not distorted”. 445 Regarding M&As, the aim is to block “a concentration which
creates or strengthens a dominant position as a result of which effective competition in the common
market or in a substantial part of it is significantly impeded”. 446 447 These transatlantic anti-trust law
differences have repeatedly led to major economic and political tensions between Washington and
Brussels, not least over the BMD merger. Americans view the EC’s restrictive anti-trust approach
as an attempt to shield Europe’s companies from globalisation, particularly US competition.
Europeans, in turn, charge that Washington is lax about anti-trust enforcement to allow US
companies to become dominant global players, which, ultimately, would also threaten the survival
of their European competitors. “Where Americans see tough competition, Europe sees unfair
competition.” 448
LMC’s US$11.6 billion NGC take-over attempt, announced in July 1997, was an important turning
point in the US government’s permissive A&D merger policy. 449 The LMC bid was clearly driven
by the BMD merger, which had just received US anti-trust approval. 450 To allay DoJ fears of an
even bigger LMC dominating the defence market, Norman Augustine argued that his company was
a “merchant buyer and merchant supplier” that buys from and sells to its competitors. 451 He also
emphasised that “size alone is not a factor in anti-trust” and asked regulators to analyse LMC’s
competitive position “market by market”. 452
In March 1998, DoJ and DoD decided against the LMC / NGC deal since it would reduce A&D
competition to unacceptable levels. According to Jacques Gansler, the merger was blocked because
of concerns about the anti-competitive effects of vertical integration – with NGC serving as a key
subcontractor to Boeing and LMC – rather than horizontal integration. 453 454 The Clinton
444 FTC (24 July 1997)
445 Article 3(g), EC Treaty. The Lisbon Treaty repealed this provision. A new legally-binding Protocol on Internal
Market Competition states that “the internal market as set out in Article 2 of the Treaty on European Union includes a
system ensuring that competition is not distorted”. This thesis is based on the EC Treaty.
446 The principles of EU “competition policy” are laid out in Articles 81 to 89 of the EC Treaty.
447 The EU’s anti-trust authority covers all “concentrations” with a “Community dimension”. For more details:
http://europa.eu/legislation_summaries/other/l26046_en.htm
448 Anti-trust expert Eleanor Fox quoted in Pearlstein (1997)
449 Chuter (1997)
450 Ibid., p. 24
451 Chuter (1997)
452 Warwick (1997)
453 Gansler (2006) p. 14
454 Nicoll (1998)
118

administration’s volte-face took many business leaders by surprise and brought the “merger mania”
that had gripped the US A&D industry after the end of the Cold War to an abrupt end. 455
455 “The ‘Last Supper’ in the early 1990s ushered in a period of industry consolidation, and the disapproval of the [LMC
/ NGC] transaction in the late 1990s was accompanied by statements from senior [government] leaders that further toplevel
consolidation would be more difficult. Since that time, however, DoD has not given any top-level guidance.”
Bialos (2009) vol. II, p. 646
119

3.4 The race to scale: US aerospace and defence industry consolidation after the Cold War
“[T]he most powerful DoD actions [in response to the post Cold-War downturn] by far were
directed at supporting and subsidising merger and consolidation in the defence industry” 456 . Even
before the Clinton administration began to promote A&D consolidation, US companies had already
embarked on a path toward an ethnocentrically-concentrated defence industrial base. 457 An analysis
of key M&As in the American defence industry during 1989-1996 – after the end of the Cold War
but before the BMD merger – demonstrates that “this merger movement, involving predominantly
defence versus commercial acquisitions, did accelerate significantly through 1993 [the year of the
Clinton administration’s first BUR] and culminated in a series of mega-mergers in 1994, 1995, and
1996” 458 : In 1991, the total M&A volume in the US defence industry amounted to US$300 million;
by 1993, that figure skyrocketed to US$14.2 billion; and in 1996, the value of defence M&As
topped US$20 billion. 459 It is important to emphasise that virtually all of these US transactions were
based on ethnocentric consolidation, not international integration.
The US A&D industrial consolidation process can be divided into several “waves”: 460 1 st wave:
M&A activity involving top-tier manufacturers (Boeing, MDC, Lockheed, etc.) leading to the
creation of mega-primes; 2 nd wave: M&A activity involving lower-tier suppliers (Loral, Hughes
Electronics, etc.); 3 rd wave: post-merger integration / rationalisation within the “new”, bigger
primes and suppliers, notably through restructuring, cost and job cuts, divestitures, etc. Many
industry experts also anticipated a fourth “wave” involving major transatlantic M&As between US
and European companies, though the exact timeline for such unprecedented moves was seen as very
uncertain. 461
The first of the major “pure play” defence M&A deals that would eventually lead to the creation of
several US mega-primes took place in 1994, just one year after the famous “Last Supper”. 462 In
April 1994, defence electronics maker Grumman accepted a US$2.17 billion hostile “market
extension” takeover bid by rival Northrop. Having failed in two previous takeover attempts,
Northrop CEO Kresa indicated that his company “was under pressure to make an acquisition or face
being swallowed by another military contractor” 463 – a clear reflection of the “conquer-or-perish
456 Oden (1999) p. 75
457 Ibid., p. 80
458 Ibid., pp. 82-83
459 Korb (1996)
460 Velocci (1997) p. 44
461 Ibid., p. 44
462 Mintz (July 1997)
463 Sims (1994) p. 6
120

ethic” 464 that dominated the thinking of A&D executives in the 1990s. The biggest “pure play”
defence link-up was announced in August 1994, when Lockheed and Martin Marietta declared their
intention to engineer a US$10 billion “merger of equals”. Lockheed and Martin Marietta were the
second and third largest US defence contractors with 1993 sales of about US$13.2 billion and
US$9.4 billion, respectively. 465 LMC posted 1994 revenues of US$23.5 billion, replacing MDC
(US$13.2 billion turnover) as the world’s #1 defence contractor. Boeing had 1994 sales of US$21.3
billion and remained the world’s biggest (civilian) aerospace company. 466
There were four strategic implications of the LMC merger for the rest of the US A&D industry: 467
First, “consolidation is far from over and the LMC merger is graphic evidence of the direction in
which the industry is headed”; second, “more mega-mergers could take place during the next year
or two, with some industry officials convinced that they are inevitable”; third, “the more pro-active
management’s strategy, the greater the potential rewards”; and fourth, “pressure to become active in
the consolidation process will increase enormously, […] [and] companies that have remained on the
sidelines will feel the increased competitive [cost] pressure most”. 468 In retrospect, all of these
predictions turned out to be true. The consolidation process intensified and weak, less competitive
firms were generally either bought up or exited the market altogether. In that sense, the LMC deal
was just a prelude to the industry’s biggest-ever merger involving Boeing and MDC. As to the
“21st century “end game” – that is, the industry’s post-consolidation structure – Velocci made this
remarkable statement:
“[A]n image is emerging of an industry marked by the concentration of vast market and
financial power in the hands of a relatively small number of companies. Their political clout
will be enormous, given the breadth of their operations scattered among many states,
including the most populous one”. 469
A&D consolidation in America was also bound to have an impact on other regions of the world,
notably Europe. In sharp contrast to their fragmented and often government-controlled European
competitors, the emerging US mega-primes were the industry’s dominant technology leaders and
“clear cost leaders” 470 :
464
(Reuters & Bloomberg, 1994)
465
Harrison (1995)
466
Velocci (1994) p. 36
467
Ibid., p. 36
468
Norman Augustine referred to “Darwinian times” in the A&D industry. “Failure to change is failure to survive”.
Ibid., p. 36
469 Ibid., p. 36
470 Velocci (1994) p. 36
121

“This is crucial because new business will be won as much on costs as on technology
differentiation. [American] companies will be more capable than they are now of competing
against non-US firms, including those subsidised by governments, and of winning new
business based on their ability to deliver high-quality products faster and cheaper.” 471
This quote sums up the fundamental competitive threat the LMC deal and previous as well as
expected future US mergers posed to Europe’s A&D industries. As more and more US A&D
companies were bought up by the emerging American mega-primes, it became clear that the only
way these giants would be able to grow further was to boost their operations / exports abroad.
Starting in early 1996, European political and corporate leaders became increasingly worried about
the rapid pace of ethnocentric US A&D industrial consolidation, which was seen as a direct threat
to the viability and independence of the European industry. 472 Interestingly, it was the UK that first
recognised the problem and began to push for more pan-European A&D industrial cooperation: 473
“[T]here is a much greater recognition among European governments that autarky in the
defence industry is no longer a practical policy.” [...]
“Although governments, and the companies they are so closely entwined with, can buck
worldwide pressures for more efficient production for some time, they cannot do so
forever.” 474
If the Old Continent failed to achieve cross-border A&D consolidation, “the risk is that Europe will
obtain increasingly ineffective defence equipment at rising prices” 475 . Furthermore, protectionist
“Buy European” instincts were awakened as European industry leaders pushed for a true “two-way
street” in terms of transatlantic defence procurement and demanded better access to the US
market. 476 As one analyst commented in mid-1996: “Everyone, it seems, is talking to everyone else
about deals, alliances, mergers and trades. Yet while the political manoeuvring is intense, few
companies have signed firm deals.” 477
471
Ibid., p. 36
472
Gray (August 1996)
473
Gray (1995)
474
Ibid.
475
Ibid.
476
BAE only launched its buying spree in the American defence sector in April 2000, well after the BMD merger.
477 Gray (August 1996)
122

3.5 Boeing, McDonnell Douglas, and the “new” Boeing
On 15 December 1996, Boeing and MDC announced the creation of the world’s largest A&D
company, allowing the world’s biggest civilian aircraft manufacturer (Boeing) to join forces with
the world’s largest military aircraft manufacturer (MDC). Both Boeing, founded in 1916, and
MDC, which was the result of the 1967 merger between Douglas and McDonnell Aircraft, ranked
among America’s best known companies, having manufactured aerospace flagship products such as
the 747 “jumbo jet”, the B-52 (Boeing), and the Tomahawk cruise missile (MDC). Boeing’s break-
through came in WWII, when the company developed the B-17, the backbone of the US strategic
bombing campaign. During the Cold War, Boeing was instrumental in building America’s nuclear
deterrent through the Minuteman ICBMs 478 . Milestones in Boeing’s commercial aircraft operations
include the 1958 jet-powered 707, which triggered massive growth in air travel, and the 747 –
introduced in 1969 – which would ultimately become the world’s most profitable aircraft model.
While Douglas was quite successful in the commercial aircraft business (DC-3, DC-8, DC-9
models), its sales began to falter as Boeing expanded its market share in the 1960s. The 1967 MDC
merger was designed to balance Douglas weakening commercial operations with McDonnell’s
strong defence division (F-101, F-4 and, later on, F-15 and F-18 fighters). The market entry of
Airbus in the early 1970s would lead to the gradual replacement of MDC as the world’s second
largest commercial aircraft manufacturer by the late 1980s. 479 Ultimately, as the BMD merger
demonstrates, MDC opted to merge with an even bigger company to assure its own survival in the
face of increasing competition and declining procurement budgets.
The US$16.3 billion transaction, the biggest A&D deal ever recorded, was completed on 1 August
1997. In 1997, the “new” Boeing, as the company was initially called, had revenues of US$45.8
billion. 480 This figure compares to a combined turnover of Boeing and MDC of US$35.5 billion the
year before and of US$33.0 billion in 1995. In 1996, the last year before the BMD merger, the
“old” Boeing had total revenues of US$22.7 billion and posted earnings of US$1.1 billion (4.8
percent operating margin). 481 The year before, Boeing had sales of US$19.5 billion and net earnings
of US$393 million. In 1996, Boeing’s commercial aircraft division accounted for US$16.9 billion
478 ICBM = Intercontinental Ballistic Missile
479 The reasons for Airbus’s growing success included the company’s focus on building an entire family of similarly
designed aircraft (thus lowering maintenance costs and making it relatively easy for airlines to assign pilots trained on
one Airbus type to other Airbus planes) and the introduction of innovative fly-by-wire technology. The respective
global market shares of the manufacturers of large commercial aircraft between 1975 and 1995 evolved as follows:
1975: Airbus 5 percent; Boeing 65 percent; Lockheed 5 percent; MDC 25 percent; 1985: Airbus 20 percent; Boeing 60
percent; Lockheed 0 percent (market exit); MDC 20 percent; 1990: Airbus 25 percent, Boeing: 60 percent; MDC 15
percent; 1995: Airbus 30 percent; Boeing 64 percent; MDC 6 percent. Figures quoted from Kovacic (2001) p. 815
480 Boeing (1998) p. 1
123

(or 75 percent) of total sales. In that sense, Boeing was predominantly a commercial aerospace
company. In contrast, defence and space operations – comprising the development and production
of military aircraft, helicopters, space and missile systems, rocket engines, mainly through US
government contracts 482 – generated only US$5.8 billion (25 percent) in revenues.
MDC posted total 1996 revenues of US$13.8 billion and earnings of US$788 million (5.7 percent
operating margin). 483 In 1996, MDC had sales of US$14.3 billion but suffered a loss of US$416
million due to the discontinuation of the MD-11. That year, MDC’s revenues broke down as
follows: military aircraft: US$8.0 billion (57 percent of sales); commercial aircraft: US$3.3 billion
(24 percent); missiles, space, and electronic systems: US$2.2 billion (16 percent); and financial
services: US$367 million (2 percent). As of 31 December 1996, Boeing and MDC accounted for 64
percent and 36 percent, respectively, of the combined pro-forma revenues of the “new” Boeing. In
terms of the “new” Boeing’s combined pro-forma assets, the Boeing and MDC shares were 72
percent and 28 percent, respectively.
The “new” Boeing’s dominant position was powerfully summarised in the opening paragraph of its
(first post-merger) Annual Report 1997:
“The Boeing Company, based in Seattle, Washington, is the largest aerospace company in
the world, as measured by total sales, and the nation’s leading exporter. Boeing is the
world’s largest manufacturer of commercial jetliners and military aircraft, and the nation’s
largest NASA [National Aeronautics and Space Administration] contractor. The company’s
capabilities in aerospace also include helicopters, electronic and defence systems, missiles,
rocket engines, launch vehicles, and advanced information and communication systems. The
company has and extensive global reach with customers in 145 countries and operations in
27 US states. Worldwide, Boeing and its subsidiaries employ more than 238,000 people.” 484
Due to the BMD merger, the commercial aircraft divison’s total revenue share dropped from 75 to
60 percent, thus enabling Boeing to better balance its cyclical commercial aircraft activities with
MDC’s more stable military aircraft business. As the “new” Boeing leaders Phil Condit and Harry
Stonecipher put it, “We have the confidence of knowing that when one market is down, another is
likely to be up.” 485 It was this ability to balance commercial and military operations that – along
481
(Boeing & MDC, 1997) p. 13
482
Ibid., p. 6
483
Ibid., p. 14
484
Boeing (1998) p. I
485
Ibid., p. 4
124

with Boeing’s sheer size and corresponding economies of scale – threatened to give the US giant a
decisive competitive advantage over Europe’s fragmented A&D industry and its crown jewel
Airbus: “We have created the world’s largest aerospace company. Now we must prove that this
giant new bird will fly farther, faster, higher – and more efficiently – than anything else in the
aerospace world. And we will.” 486
For Boeing, the MDC acquisition was a major strategic step designed to make the company less
vulnerable to the volatile market conditions in the commercial aerospace sector. Indeed, Boeing’s
mantra – “when one market is down, another is likely to be up” – is generally true. After 9/11, the
commercial aircraft market collapsed as airlines struggling with falling demand for air transport
slashed orders and / or went into chapter 11 bankruptcy protection. Boeing’s commercial aircraft
division was severely hit by the economic fall-out from the 9/11 attacks. The company’s defence
division, however, received a major boost from the massive post-9/11 increases in the Pentagon’s
procurement and operations budget as part of the Bush administration’s “global war on terror”, thus
helping to stabilise the company at a time of weak commercial sales. In that sense, Boeing’s
decision to acquire MDC and become a diversified commercial and military aerospace company
was definitely a smart move.
The sharp rise in Boeing’s 1997 revenues (+ US$10 billion) was due to its booming commercial
aircraft and information / space / defence systems divisions, as well as Boeing’s US$3.1 billion
acquisition of Rockwell’s A&D activities in 1996. Boeing’s Commercial Airplane Group – its
biggest and most important division – had revenues of US$26.9 billion in 1997 (60 percent of total
turnover), compared to US$19.9 billion (56 percent) the year before; a stunning increase of about
US$7 billion (35 percent). The overall number of commercial aircraft delivered by Boeing rose
even stronger, from 271 units in 1996 to 375 units in 1997 – an increase of 39 percent – although
one must not forget that the 1996 delivery figures were exceptionally weak compared to surging
archrival Airbus. As will be explained in more detail below, Airbus managed to gain crucial ground
on Boeing during the 1990s and early 2000s, thus eventually overtaking it both in terms of
commercial aircraft orders and deliveries. Also, while Boeing’s turnover increased sharply, the
company’s profitability was disappointing. Due to a US$3 billion pre-tax charge in 1997 primarily
related to production problems in Boeing’s (post-merger) commercial aircraft business, that
division swung from a profit of US$956 million in 1996 to a loss of more than US$1.8 billion in
1997, causing Boeing to suffer a net loss (-US$178 million) for the first time in 50 years. Boeing’s
R&D expenditures amounted to US$1.9 billion (4.1 percent of turnover) in 1997 and US$1.6 billion
486 Ibid., p. 3
125

(4.5 percent of revenues) in 1996. 487 In 1997, Boeing’s workforce amounted to about 238,000,
compared to 211,000 in 1996 and 169,000 in 1995.
In the three decades prior to the 1997 BMD merger, Boeing had established a commanding global
leadership position in the commercial aircraft business. That being said, it also became clear that
Boeing’s supremacy was increasingly challenged by Europe’s Airbus. During 1992-2004 in
particular, Airbus was gaining ground on Boeing as it came closer to and finally exceeded its long-
term goal of capturing 50 percent of the world’s 100-seat-plus commercial aircraft market. The
following statistics clearly illustrate the absolute and relative rise of Airbus vis-à-vis Boeing: 488
Year Aircraft Deliveries New Orders
Boeing Airbus Ratio Boeing Airbus Ratio
1992 572 157 3.64:1 266 136 1.96:1
1997 375 187 2:1 543 460 1.18:1
1999 620 294 2.11:1 355 476 1:1.34
2000 491 311 1.53:1 588 520 1.13:1
2004 281 305 1:1.09 272 370 1:1.37
In 1992, Boeing delivered 572 aircraft vs. 157 units for Airbus. That year, Boeing recorded 266
orders compared to 136 for Airbus. Whereas in 1992 Boeing held an 3.64 : 1 lead over Airbus in
terms of deliveries, the corresponding figure for incoming orders was merely 1.96 : 1. While in the
short term, aircraft deliveries are a much better indicator of an aerospace company’s performance, it
is incoming aircraft orders that are generally the best indicator of how that company will fare in the
future. After all, today’s aircraft orders are tomorrow’s aircraft deliveries – various degrees of order
“firmness” and escape clauses notwithstanding. 489 In 1997, Boeing and Airbus delivered 375 and
187 aircraft, respectively, yielding a 2 : 1 lead ratio for the Americans. That year, Boeing received
543 orders vs. 460 for Airbus, translating into an even smaller lead ratio of just 1.18 : 1.
In 1999, Boeing delivered 620 aircraft (a figure boosted by the MDC merger), while the Airbus
figure stood at just 294. Boeing was temporarily able to slightly widen its lead over Airbus in terms
of unit deliveries to 2.11 : 1. However, that same year, Airbus managed for the first time to secure
more aircraft orders than Boeing, beating its archrival 476 vs. 355 units and giving the European
challenger a 1.34 : 1 lead ratio. In 2000, Boeing delivered 491 aircraft vs. 311 for Airbus, a lead
ratio reduced to 1.58 : 1. With 588 new orders that year, Boeing just narrowly managed to reclaim
487 Boeing (1998) p. 1
488 Airbus order and delivery figures: http://www.airbus.com/en/corporate/orders_and_deliveries/ Boeing order and
delivery figures: http://active.boeing.com/commercial/orders/index.cfm
489 “In the last few years, Airbus and Boeing have repeatedly disputed market share-related statistics as well as the
definition of firm orders, options, commitments, and letters of intent.” Sparaco (March 1998) p. 49
126

its leadership position compared to 520 new aircraft orders for Airbus (1.13 : 1 lead ratio for
Boeing). Finally, by 2004, Airbus had firmly secured its long-term goal of capturing 50 percent of
the world’s large commercial aircraft market: Airbus delivered 305 aircraft vs. 281 for Boeing (a
near-parity lead ratio of 1.09 : 1) and received orders for 370 planes vs. Boeing’s 272 (a lead ratio
of 1.37 : 1). Since 2003 Airbus has persistently outperformed Boeing in terms of new aircraft
deliveries.
The rise of Airbus is also very impressive when one analyses the financial performance figures for
the 1992-2004 period. 490 In 1992, Airbus had an annual turnover of US$ 7.7 billion while new
orders amounted to US$9.8 billion. By 1997, Airbus’s turnover had increased to US$11.6 billion
while its incoming orders soared to US$ 29.6 billion. Boeing’s corresponding commercial aircraft
turnover in 1997 was US$27.0 billion (giving it a 2.33 : 1 lead ratio) while new orders totalled
US$39.1 billion (Boeing lead ratio of 1.32 : 1). In 1999, Airbus’s revenues reached US$16.7 billion
while new orders totalled US$30.5 billion. The corresponding Boeing 1999 commercial aircraft
revenue figure was US$38.5 billion (thus reducing Boeing’s lead ratio to 2.30 : 1). In 2000, the
Airbus turnover amounted to US$17.2 billion, with new orders totalling US$41.3 billion. The
corresponding 2000 commercial aircraft revenue figure for Boeing was US$31.2 billion, thus
further eroding the American company’s lead ratio over Airbus to 1.81 : 1. By 2004, Airbus
revenues had reached EUR20.2 billion (US$27.5 billion) 491 while new orders totalled US$34.4
billion. The corresponding turnover figure for Boeing’s commercial aircraft group that year was
US$21.0 billion, giving Airbus a 1.31 : 1 lead ratio over its archrival.
All of the metrics highlighted above paint the same picture of a rising European Airbus challenger
gaining ground and eventually overtaking long-time US hegemon Boeing in the world’s
commercial aircraft market during the 1992-2004 time frame; that is in the run-up to, during, and
after the BMD merger:
“Over the past ten years, the [Boeing] Company (including [MDC]) has maintained, on
average, approximately a two-thirds share of the available commercial jet aircraft market.
Airbus Industrie is an aggressive competitor seeking to increase market share. This market
environment has resulted in intense pressures on pricing and other competitive factors.” 492
490 All Airbus figures are based on the company’s 1989-2008 results available at:
http://www.airbus.com/en/airbusfor/analysts/ . The Boeing figures are compiled from Annual Reports.
491 EUR1 = US$1.36 (31 December 2004)
492 Boeing (2000)
127

To compensate for the rise of Airbus, “Boeing set out to build a position of leadership in
information, space, and defence markets comparable to the one […] [it had] long held in
commercial aircraft” 493 . The BMD merger was therefore an important milestone towards creating a
“new” Boeing which would be more diversified and better able to weather the ups and downs of the
commercial and defence aircraft businesses:
“Based on 1997 results, it is clear that the new combined company has, indeed, achieved a
position of enormous breadth and strength in the targeted areas […] [which promise a]
tremendous future for Boeing in information, space and defence.” 494
Boeing’s Information, Space, and Defence Systems (ISDS) division comprises the development and
production of fighter, bomber, and military transportation aircraft, helicopters, as well as missile
systems. In 1997, ISDS had revenues of about US$18.1 billion – accounting for 40 percent of total
turnover 495 – and an operating profit of US$1.3 billion (7.3 percent margin). Key ISDS programmes
include the F/A-18E/F and F-22 fighters, the C-17 Globemaster III airlifter, the Apache and
Comanche helicopters, the V-22 Osprey, the AWACS-equipped 496 Boeing 767, the Space Shuttle
(in a joint venture with LMC). The ISDS group was highly diversified, with no single program
accounting for more than 15 percent of total division revenues during the 1995-1997 timeframe. A
high degree of diversification in its stable defence business provided the “new” Boeing with an
additional hedge against its cyclical commercial aircraft business.
A look at the evolution of Boeing’s revenue mix during 1996-2004 clearly illustrates the growing
importance of the company’s defence activities. After the share of military sales had temporarily
dropped to 33 percent (due to a strong increase in commercial aircraft sales), Boeing managed to
bring that figure back to 40 percent in 2000. In 2002, as the Bush administration’s post-9-11
defence spending began to kick in, the share of Boeing’s defence-related revenues rose to 46
percent. In 2003, that share increased to 54 percent while in 2004 it even reached 58 percent. 497
Within eight years, Boeing had transformed itself from an aerospace company heavily dependent on
commercial sales (75 percent in 1996) to one where defence operations constituted the majority of
its revenues (58 percent in 2004).
493 Ibid., p. 24.
494 Ibid., p. 24.
495 Boeing’s 1997 ISDS sales broke down as follows: USAF: 30 percent; Navy: 18; NASA: 15; Army: 6; other: 9;
exports: 22.
496 AWACS = Airborne Warning and Control System
497 Boeing (2005) pp. 38-47
128

Prior to Boeing’s take-over, MDC experienced major problems with its commercial aircraft division
(DAC) 498 . By 1996, DAC’s share of new orders world-wide had dropped to only four percent. 499
Airlines who had previously been DAC customers were increasingly switching to Boeing and
Airbus. Furthermore, DAC received no orders for its newly developed MD-95 aircraft. Three
reasons accounted for DAC’s weak position: 500 First, the “lack of a full family of aircraft”; second,
“customer and marketplace uncertainty as to the future of DAC”; and three, “investment in product
development at levels significantly below competition”: In sum, “[MDC] never really had a chance
at survival. In an industry which increasingly favours consolidation, a niche player with inadequate
501 502
new aircraft development plans was doomed for some time”.
MDC considered several options to improve DAC’s performance, including “strategic alliances”
with non-US companies which could provide fresh capital and access to new markets; major
internal investments (estimated cost: up to US$15 billion) 503 in DAC’s infrastructure and product
development enabling it to build a full family of aircraft which could then successfully compete
against Boeing and Airbus; positioning DAC as a niche player in the commercial aircraft business;
the sale of DAC; and, finally, shutting down DAC’s development and production unit while
keeping the spares business. 504 On the defence side, MDC had also lost out in the early stages of the
Pentagon’s US$200 billion Joint Strike Fighter (JSF) programme, the largest military acquisition
programme in history. 505 MDC’s weak commercial and military aircraft market positions in 1996
cast serious doubts on the firm’s longer-term ability to survive as an independent A&D company.
While MDC considered the option of entering into “strategic alliances” with non-US partners to
prop up its commercial aircraft division, there are no indications that the company contemplated a
full-fledged merger with a European / foreign which would also include its sensitive defence
operations.
Boeing and MDC had held exploratory talks about a potential strategic alliance and even a full-
blown merger as early as 1994-1995. 506 However, given the uncertain market outlook for both
commercial and military aircraft at the time, the two firms failed to narrow their differences over
498
DAC = Douglas Aircraft Corporation
499
(Boeing & MDC, 1997) p. 35
500
Ibid., p. 35
501
Aboulafia (1998) p. 43
502
From the US perspective, “European subsidies to Airbus had a direct impact on the exit of [MDC] from the market
as an independent [large civil aircraft] manufacturer and its subsequent merger with Boeing.” Commission on the
Future of the United States Aerospace Industry (2002) p. 6-19
503
(Boeing & MDC, 1997) p. 35
504
Ibid., pp. 35-36
505
For cynics “JSF” denotes “Jointly Spent Fortune”. The Economist (July 2002)
506
For an account of the BMD merger talks, see (Boeing & MDC, 1997) pp. 25-29.
129

MDC’s precise valuation. MDC forecast strong sales and earnings growth and therefore demanded
that Boeing pay a 30-percent premium on its share price. Since Boeing offered only a 10-percent
premium the talks were terminated in December 1995. In mid-September 1996 – following DAC’s
dismal performance in the commercial aircraft business – MDC CEO Stonecipher approached his
Boeing counterpart Condit to see whether there was still interest in a full-scale merger. While
Condit rejected new merger talks, the Boeing and MDC executives in charge of the commercial
aircraft divisions started discussions on a collaborative agreement which would allow Boeing to
utilise MDC engineers for the design and development of its planned future wide-body aircraft. The
talks progressed very quickly and on 3 December 1996, the two companies announced their
“strategic collaboration” on commercial aircraft to the public. 507
Just three days later, Condit called Stonecipher to tell him that Boeing was interested in a merger
with MDC after all. Apart from the “strategic collaboration” agreement, it was the on-going
consolidation in the US A&D industrial base in the fall of 1996 which played an important role in
reversing Boeing’s initial rejection of a merger with MDC. 508 Boeing offered a simple stock-for-
merger deal with a 21-percent premium to MDC’s closing share price on 13 December, the last
trading day before the planned merger. This 21-percent premium compromise was roughly half-way
between the 30-percent and 10-percent premiums demanded / offered by MDC and Boeing a year
earlier. On 10 December, Condit and Stonecipher hammered out a preliminary merger agreement
spelling out the key terms of their planned deal. Four days later, Boeing and MDC held special
board meetings and approved the merger: 509
“The Boeing board believes that the merger represents a unique opportunity to create a
stronger company with a broader base of defence and space product programs and
international businesses opportunities, and that in the current environment of declining
defence spending and industry consolidation, the deal was deemed to be of critical strategic
importance to Boeing’s efforts to position itself as an effective competitor in the coming
years. […] In addition, the merger would enable Boeing to achieve its strategic goal of
balancing its commercial aviation business (which now represents almost three-fourths of
its overall business) with a larger defence and space business.” 510
507 Ibid., p. 27
508 Ibid., p. 27
509 For a description of the factors considered by Boeing and MDC in weighing the BMD merger’s pros and cons, see
Ibid., pp. 28-38.
510 Ibid., p. 30
130

Furthermore, Boeing hoped to leverage MDC’s military division for its JSF bid and anticipated
synergies from the two companies’ space units. Boeing (like MDC), also took a variety of “material
factors” into account when weighing the pros and cons of the BMD merger, including the industry,
economic and market dynamics at the time, the due diligence reviews regarding, the ability to
obtain regulatory approval for the merger, etc. 511
“The [MDC] Board believes the merger offers [MDC] and its shareholders an opportunity
to participate in the creation of a leading [A&D] company which can provide the critical
mass and economies of scale necessary to compete effectively in the current global business
environment. The [MDC] Board believes that the combined revenues of [MDC] and Boeing,
the potential for significant cost savings, the complementary nature of their respective
businesses, and the increased geographic presence and expanded contribution to the US
industrial base that would result from the merger are compelling reason for the
combination of [MDC] and Boeing.” 512
MDC recognised that it was under severe pressure to respond to recent M&A deals by two of its
competitors (LMC and Raytheon) that, “within the past two years, [had] consummated or entered
into agreements to consummate transactions significantly increasing their size” 513 . On the
commercial aircraft side, MDC reasoned that the BMD merger provided the best opportunity for its
engineers to apply their know-how across the full range of the “new” Boeing’s commercial aircraft
family.
Following approval by the Boeing and MDC boards on 14 December 1996, the BMD merger was
made public the following day. The only remaining obstacle to the creation of the world’s largest
A&D company was the necessary regulatory anti-trust approval by the FTC and the EC 514 As was
already discussed in Chapter 1, the US and European governments have repeatedly accused each
other of providing unfair direct and indirect government support (R&D launch aid in the case of
Airbus, military to commercial spill-over benefits in the case of Boeing) to their respective
commercial aerospace champions. While the EU-US Aircraft Agreement of July 1992 had provided
a temporary fix and averted a transatlantic trade war, it became quite clear that the BMD merger
reviews risked reviving the underlying tensions between Europe and America.
511 For the “material factors” considered by Boeing and MDC, see Ibid., pp. 30-31 and pp. 36-38.
512 Ibid., p. 35
513 Ibid., p. 35
514 Ibid., pp. 48-50
131

Boeing and MDC informed the FTC and the EC of their merger on 29 January and 18 February
1997, respectively. 515 The FTC – advised by DoD and DoJ – received millions of pages of
documents from the two companies and conducted numerous interviews during its inquiry. 516 The
EC reviewed thousands of pages of documents and only conducted a small number of interviews. 517
Throughout the anti-trust investigations, FTC and EC officials exchanged views and information to
keep each other abreast of their deliberations. On 21 May 1997, the EC released a statement
highlighting its objections to the BMD merger with regard to, inter alia, increased concentration in
the international commercial aircraft market, the combination of patent portfolios as well as the
potential technological spin-off effects from MDC’s government-funded R&D and space programs
on Boeing’s commercial activities. 518 On 26 June, the EC informed the FTC about its concerns
regarding the potential anti-competitive impact of the BMD merger on the large commercial aircraft
market.
The FTC announced on 1 July after a 4-1 vote that “no further action is warranted […] at this time”
and that it would therefore approve the BMD merger without any conditions. 519 The four FTC
Commissioners who voted for the BMD merger gave two reasons for their decision. First, they
believed that MDC’s commercial aircraft division DAC was no longer “a meaningful competitive
force” due to its inability to match either of its rivals Boeing and Airbus in terms of “new product
lines, production facilities, company infrastructure, or research and development”. 520 Second, the
FTC concluded that the BMD merger “does not threaten competition in military programs” since
“there are no current or future procurements of fighter aircraft by the [DoD] in which the two
companies would likely compete”. 521 522 The only dissenter was Commissioner Azcuenaga:
“The horizontal combination of two of the three firms in the [commercial aircraft] market
appears to present a rather straightforward case for a challenge by the Commission. Absent
action by the Commission, the merger will eliminate one of three firms in a highly
523 524
concentrated market in which entry is difficult and unlikely.”
515 For a chronological overview of the US/EU BMD merger review, see Kovacic (2001) p. 817.
516 The BMD merger triggered “one of the most detailed and wide-ranging investigations in the history of merger
enforcement”. FTC (24 July 1997)
517 Kovacic (2001) p. 825
518 For Boeing’s response to the Statement of Objections issued by the EC on 21 May 1997, see Boeing (1997).
519 FTC letter (1997)
520 Kovacic (2001) p. 828
521 Ibid., p. 830
522 “Boeing and [MDC] viewed the transaction from the outset as fundamentally a defence merger in which the parties
had complementary strengths and few horizontal overlaps.” (Boeder & Dorman, 2000) p. 2
523 FTC (1 July 1997)
524 Market entry is easy if it is “timely, likely and sufficient in its magnitude, character and scope to deter or counteract
the competitive effects of concern”. FTC / DoJ’s horizontal merger guidelines quoted in FTC (24 July 1997).
132

After the Americans realised in late June that the EC was seriously considering either blocking or
requiring substantial changes to the proposed BMD merger (i.e., forcing Boeing to shed DAC)
high-level Clinton administration officials turned the heat on Brussels and disputed the EC’s legal
basis for imposing certain anti-trust restrictions. 525 526 US anti-trust czar Joel Klein confirmed that
he met with EC representatives (including Competition Commissioner Karel van Miert) during the
final stages of the review process “during which we [American government officials] explained
how an EU prohibition of the merger could harm important US interests”. 527 President Clinton
threatened to retaliate against the EU through a formal WTO complaint or the imposition of
unilateral US trade sanctions if Brussels were to block the merger. 528 529 Vice President Gore vowed
that Washington would take “whatever action is appropriate” to prevent the EU from impeding the
BMD merger 530 and also warned of direct retaliation against European firms. 531 Finally, the House
and Senate passed resolutions in July 1997 condemning the EU’s “unwarranted and unprecedented
interference” in the merger of two American firms. Congress went on to charge that the EU’s
potential blocking of the BMD merger was designed “to gain an unfair competitive advantage for
Airbus” and that the related transatlantic tensions “could threaten to disrupt the overall relationship
between the EU and the [US]”. 532
It was obvious that the BMD merger was not a “normal” business transaction, but that “EU and US
government leaders [viewed it] as a sensitive adjustment in the political and economic order and
were certain to follow its passage through the regulatory process attentively”. 533 534 Boeing and
MDC did recognise that they would need to comply with the EC’s anti-trust review before
consummating the proposed BMD merger. 535 However, “it seem[ed] equally clear that
underpinning Boeing’s [EC] strategy was a wait-and-see approach in hopes that US government
lobbying would win the day for the company without having to make more [anti-trust] concessions
525 Phil Condit refused to shed DAC, calling such a move “extremely disadvantageous”. The Clinton administration
backed Boeing’s position, arguing that only the country with direct jurisdiction over the BMD merger (the US) could
impose such important restrictions. Morocco (July 1997)
526 Some American anti-trust law experts believed that “Action by the EC to block the merger or interfere with existing
contracts between Boeing and US customers […] would be contrary to well-established principles of international
comity”. This narrow US-centric anti-trust approach is mistaken. “Although EU approval is not a formal part of the US
merger process, under a 1991 agreement the US recognizes the [EC]’s right to review such mergers owing to their
potential impact on the European marketplace.” AWST (Aviation Week & Space Technology) (28 July 1997) p. 18
527 Kovacic (2001) p. 826
528 Coleman (1997)
529 Washington considered imposing punitive tariffs on European airplanes and limiting the number of flights between
the US and France. (Pearlstein & Swardson, 1997)
530 (Skapinker & Tucker, 1997)
531 Kovacic (2001) p. 826
532 House (1997) and Senate (1997)
533 Kovacic (2001) pp. 816-817
534 “If the [FTC] says yes and the [EC] says no, or fines Boeing, it will no longer be a Boeing-EC issue. I think that
would elevate it to a trade issue between the [US] and Europe.” Boeing spokesperson quoted in AFP (1997).
535 (Boeing & MDC, 1997) p. 49
133

than were absolutely necessary.” The close ties and coordination between Boeing and the Clinton
administration were not lost on the Europeans. As Commissioner Van Miert put it, “Boeing is a
private company but it seems to behave as if it were a public one.” 536 Airbus Managing Director
Jean Pierson came out strongly against the BMD merger:
“The proposed [BMD] merger agreement is a new attempt to force Europe, not only Airbus,
to remain a marginal competitor and to monopolise the [commercial transport] market.”
[…] “This is an undertaking whose aim it is to undo more than 25 years of joint European
efforts against US hegemonic will, known as monopoly.” 537
On 30 July 1997, the EC approved the BMD merger under certain conditions, notably that Boeing
abandon its existing 20-year exclusivity agreements with American, Delta, and Continental
airlines. 538 Key to the EC’s decision was the view that Boeing’s 60-plus-percent market share of the
commercial aircraft business already constituted a “dominant market position”. An unrestricted
BMD merger would have entrenched Boeing’s market dominance and threatened Airbus’s
survival. 539 While the FTC considered Boeing’s exclusivity deals “potentially troubling”, it argued
that they concerned “only about 11 percent” of the world’s commercial aircraft market. Boeing
agreed to comply with the EC’s anti-trust conditions. 540 541 The EC acknowledged that it had taken
into consideration concerns voiced by DoD and DoJ to the effect that a blocking of the BMD
merger “could harm important US defence interests”. 542 The EC ultimately decided to focus on the
commercial aircraft market and dropped its concerns about potential technological spin-off effects
from MDC’s government-funded R&D and space programs on Boeing’s commercial activities.
Even though a transatlantic trade war was ultimately averted, the massive threats and accusations by
political leaders in America and Europe during the BMD merger’s anti-trust review certainly left a
bitter aftertaste on both sides of the Atlantic. 543 On the one hand, many Americans believed that the
EC decision was driven by “naked economic nationalism” 544 to shield Europe’s heavily subsidised
Airbus consortium from international competition. 545 On the other hand, many Europeans saw the
536 Morocco (July 1997)
537 Sparaco (June 1997) p. 20
538 EC (1997)
539 Kovacic (2001) pp. 832-833
540 If Boeing had ignored the EC ruling and proceeded with the BMD merger, Brussels could have imposed a fine equal
to 10 percent of the merged company’s annual turnover.
541 See Morocco (July 1997) for Boeing’s other concessions to comply with the EC ruling.
542 EC (1997) paragraph 12
543 “This is not the first time that a foreign government has insisted upon adjustments in a merger involving US
companies. It is the first time that you have so dramatic a difference in opinion about whether intervention was
appropriate. That’s what made this one different.” Kovacic quoted in (Gavacs & Gee, 1997).
544 Kovacic (2001) p. 808
545 “Based on comments by [Commissioner Van Miert], it was clear from the outset that the [EU] viewed the proposed
merger in a political as well as a competitive context. [...] At the centre of the controversy were the exclusive, long-term
134

FTC’s unconditional approval of the BMD merger as clear proof of a political fix by the Clinton
administration and a brazen assault on key European economic interests. 546
contracts that Boeing signed with American, Continental, and Delta airlines. They had nothing to do with unfair
competition or anti-trust issues. [Airbus] fought for the same block of business. […] By forcing Boeing to compromise
on the principle of tough but fair competition, the EU effectively penalised Boeing for the inability of Airbus to make
greater inroads in the US market. Basically, the EU used anti-trust arguments as a blatant smoke screen for pursuing
protectionist policies.” AWST (28 July 1997) p. 78
546 President Chirac applauded the EC’s intervention in the BMD merger review and expressed concern that the
proposed transaction “could be extremely dangerous for [Europe’s]” economic / strategic interests. (Ernsberger, Jr.,
Warner, & Theil, 1997). German Economics Minister Rexrodt also backed the EC. Reuters (1997)
135

Chapter 4: The EADS Merger
4.1 Aerospace and defence industrial consolidation, collaboration, and competition in Europe
The purpose of this chapter is three-fold. First, it puts the EADS merger in the wider historical
context of A&D industrial consolidation, collaboration, and competition in Europe. Second, it
provides an overview of EADS and its three founding companies at the time of the 1999 merger
agreement. Finally, this chapter contrasts the different approaches adopted by Europe’s major
powers – France, Germany, and the UK – in dealing with their respective A&D companies and
analyses how the interplay with each country’s foreign and security policy has shaped this strategic
industry sector. By the early 1990s, the A&D industries in France, Germany, and the UK had
already gone through successive rounds of national consolidation in the 1960s, 1970s, and 1980s
culminating in the creation of different “national champions”. These previous rounds of national
consolidation as well as the various attempts at (European) cross-border mergers and collaborative
schemes provide the relevant historical context for the EADS merger during the post-Cold War era.
The shadow of the past was an important factor since those who occupied top positions in the
aerospace sector in the 1990s had learned their jobs during the 1960s and 1970s. 547
The earlier national consolidations and international collaboration efforts were driven by the
increased technological sophistication and exponentially rising development costs of both civil and
military aircraft. In addition, strong US competition also demonstrated the limits of the fragmented
and dispersed European aerospace industry. Given the significant control and influence exerted by
national governments over their respective domestic A&D companies – through direct
shareholdings, defence procurement decisions, anti-trust policies, export controls, etc. – M&As in
this important sector were often initiated and had to be approved by the relevant government
authorities. However, the creation of national A&D champions also had its downsides:
“[T]he lack of competition between defence contractors, the cosy relationship between
industrial managers, civil servants and military personnel, the weakness of cost control, and
the inefficiency of much defence research and development and production” 548 .
Governments had to make careful decisions about whether they believed that either increases in
scale (consolidation) or the intensification of competition among different (national) A&D groups
would eventually result in greater production and R&D cost savings. Government and business
leaders also had to weigh the potential costs and benefits of pursuing national vs. international /
547 “Efforts by the European governments to shape the structure of their aeronautics industries have been aimed at
consolidation and international collaboration since the end of [WW] II.” GAO (1994) p. 4
548 (Walker & Gummett, 1989) p. 422
136

transnational R&D and production strategies. By the early 1990s, “the numerous aircraft and engine
manufacturers that existed during the 1940s and 1950s in France, Germany, and the [UK] had been
narrowed down to five major civil aircraft and engine manufacturers […] through mergers,
takeovers, and bankruptcies” 549 . The UK and Germany ultimately chose scale over competition.
After successive rounds of consolidations following WWII, both countries had only one (privatised)
national A&D champion (in terms of aircraft makers) left by the early 1990s: BAe and DASA.
France’s situation was more complex as Paris decided to maintain two A&D groups (in terms of
aircraft makers): the bigger, government-owned Aérospatiale and the smaller, partly government-
owned but family-controlled Dassault Aviation. In the aircraft engine business, too, only two
independent European manufacturers remained: France’s government-owned SNECMA 550 and the
UK’s Rolls Royce.
The following section highlights the national consolidation as well as the international collaboration
of the A&D industries in France, Germany, and the UK up to the early 1990s. Despite certain
differences between their industrial policies – France’s was more dirigiste – both the British and
French governments essentially agreed on the same overall strategic objectives following WWII:
first, the aerospace industry should be under governmental control; second, the government should
provide R&D grants to boost the technological sophistication and innovation capacity of their
respective national aerospace companies; finally, Paris and London recognised that they would need
to consolidate their national aerospace industrial bases to gain competitiveness vis-à-vis the
dominant US rivals.
After WWII, France’s aeronautics industry was highly fragmented, comprising several small,
independent aircraft and engine manufacturers. 551 Following a first round of industry consolidation
during the 1950s, Paris encouraged the emerging regional, partially state-owned champions to
pursue a sectoral aerospace industrial specialisation during the 1960s, ranging from civil and
military transport aircraft to helicopters, ballistic missiles as well as business and combat aircraft.
France’s “big bang” occurred in 1970, when the French government initiated the merger of three
(partially) state-owned aerospace companies 552 to create “national champion” Aérospatiale. While
Paris subsequently made several attempts to merge Aérospatiale and Dassault, the latter has to this
day maintained its corporate identity and managerial independence. 553 In the aircraft engine
business, France’s SNECMA, founded in 1945, did extremely well. By the 1990s, it had become a
549
GAO (1994) p. 4
550
SNECMA = Société Nationale d’Étude et de Construction de Moteurs d’Aviation
551
GAO (1974) pp. 18-21
552
Sud Aviation, Nord Aviation, SEREB
137

major player on that highly concentrated and competitive market, along with America’s GE and
P&W (Pratt & Whitney) as well as the UK’s Rolls-Royce. In sum, “France has a far more vertically
integrated aerospace industry than any other European country has, with market leaders in civil and
military engines and avionics, weaponry, aerostructures, and other subcomponents.” 554
While Germany had the world’s most advanced aeronautics industry at the end of WWII, West
Germany was not allowed any aeronautics R&D and production capacities until 1955. 555 Shortly
afterwards, many of the often family-owned aeronautics companies re-entered the aircraft business.
In the 1960s, the West German government pushed for aerospace industry consolidation,
threatening to withhold any future federal defence procurement contracts from those companies
opposed to industry consolidation. The strategy worked and by the end of the decade the number of
major German aeronautics companies had been reduced to four: MBB (Messerschmitt-Boelkow-
Blohm), Germany’s dominant aircraft firm, VFW-Fokker, Dornier, and engine manufacturer MTU
(Motoren und Turbinen Union). The “big bang” occurred in 1989, when Daimler-Benz AG,
Germany’s biggest industrial company, set out to form “national champion” DASA by combining
the activities of MBB, Dornier, MTU, and electronics company TST. DASA was now both
Germany’s only large civil aircraft manufacturer, its only combat aircraft maker (in cooperation
with international partners), as well as the country’s biggest aircraft engine manufacturer.
In the UK, there existed about 70 different aircraft and aircraft engine manufacturers at the end of
WWII. 556 By the early 1960s, numerous M&As as well bankruptcies had consolidated the UK
aerospace industry into just two major players: Hawker Siddeley and BAC. The UK’s “big bang” to
create the country’s national A&D champion occurred in 1977, when London nationalised Hawker
Siddeley and BAC to create BAe. In 1981, the Thatcher government partially privatised BAe and
sold a 51.57 percent stake in the company, before shedding its remaining shares in 1985. To this
day, however, London retains a £1 “Golden Share” in BAE to retain control over the company’s
strategic decisions. 557 On the aircraft engine side, Rolls-Royce was able to establish itself as the
leading UK manufacturer by 1966.
The A&D industry’s ethnocentric consolidation in France, Germany and the UK beginning in the
1950s and 1960s was accompanied by numerous attempts to foster international collaboration on
553
Paris transferred its 45.76 percent stake in Dassault to Aérospatiale in 1998 and subsequently to EADS.
554
Aboulafia (2001)
555
GAO (1994) pp. 29-31 and Milosch (2006) pp. 132-135
556 GAO (1994) pp. 40-41
138

civil and military aircraft manufacturing, involving both European countries and America, through
NATO. 558 At the time, US companies controlled 70 to 80 percent of the world’s non-Communist
civilian and military aircraft sector. Given the fragmented nature of Europe’s aerospace markets and
industries, European companies found it very hard to compete successfully against their bigger and
more advanced US competitors. In civil aircraft manufacturing, international collaboration was
largely driven by exponentially rising R&DP costs. 559 The costs for launching a new large
commercial aircraft (measured as the proportion between launching cost to the manufacturer’s
equity) 560 and the “average aircraft manufacturing costs per seat” rose dramatically between 1936
and 1991, more than quadrupling from around US$65,000 to US$275,000 per seat between 1970
and 1991 alone. 561
In contrast to US aircraft manufacturers, which could rely on their vast, largely protected domestic
market to offset rising R&DP costs, “the list of unsuccessful commercial aircraft built by individual
[European] countries grew to be a long one” 562 (France’s Languedoc, the Dutch-German VFW-
Fokker 614, the UK’s de Havilland Comet, etc.). The few (relatively) successful European
commercial aircraft included the Dassault Falcon and Sud Caravelle (France), the Vickers Viscount,
and the Dutch Fokker F27 and F28. 563 The associated significant increase in market and survival
risks impelled Europe’s relatively weaker and more fragmented aerospace firms to (1) further
consolidate nationally, and (2) to look for partners abroad to pool resources, lower R&DP costs,
expand beyond protected (captive) national markets to increase exports, and to ultimately share /
reduce risks.
To gain access to the American civil aviation market, European aerospace companies made several
attempts to collaborate with US companies in the 1950s and 1960s. However, all of these planned
collaborative projects were abandoned by the American side before they reached fruition. 564 The
Europeans tried repeatedly to enter into production agreements with US partners to jointly
manufacture particular European aircraft. For instance, Britain’s de Havilland Aircraft company
attempted to convince Boeing to jointly manufacture the Trident, while France’s Sud Aviation
557
The Golden Shares give the British government important rights, including “UK citizenship requirements for the
companies’ boards of directors; control over the percentage of foreign-owned shares [usually limited to 15 percent]; and
approval requirements for the dissolution or disposal of any strategic assets.” Bialos (2009) vol. II, p. 612
558
Hayward (1986)
559
“[T]echnological advances have extended developmental lead time, increased launch costs, complicated marketing,
and lengthened the time between initial research and revenue earning”. Golich (1992) p. 903
560
For additional information on this sharp rise in R&DP costs, see Ibid., pp. 905-906
561
Harold Shenton, AVMARK Inc., (Arlington, VA, 1991) cited in Ibid., p. 907
562
Ibid., p. 915
563
Even those relatively successful European aircraft rarely reached three-digit sales figures. Ibid., p. 915
564 Ibid., pp. 914-918
139

eached out to Douglas to produce the Caravelle. However, Boeing and Douglas reasoned that they
had more to gain from developing and manufacturing their own aircraft, thus allowing them to
further consolidate their commercial and technological leadership position vis-à-vis Europe and the
rest of the world. Cooperating with the Europeans was simply not in the interest of US companies,
as such a move would not only have opened up America’s hitherto captive aircraft market to
foreign products but also risked boosting the rise of European competitors who were bound to
benefit from transatlantic cooperation in the form of increased sales, economies of scale as well as
(informal) technology transfers and learning effects.
This position of inferiority and weakness vis-à-vis America was very frustrating for the European
aerospace companies. “[A]s US dominance of commercial-class manufacturing increased,
Europeans sought to avoid a situation in which their manufacturers would be relegated to the
production of components” 565 . European policymakers realised that it was high time to boost the
relative competitiveness of their aerospace industries to take on “The American Challenge” 566 :
“For high-cost, high-risk industries such as aircraft manufacturing, transnational
[European] production was encouraged as the best way to reduce R&DP risks and to
expand market access. Despite historical animosities among individual European states and
lingering suspicions about joint ventures, officials in most states decided that intra-
European collaboration was preferable to trans-Atlantic or Pacific Rim arrangements
because they were less suspicious about one another than they were about the [US] or
Pacific Rim countries.” 567
Europeans were determined “to resist and to match American technological ‘imperialism’” 568 .
European officials also wanted to prevent “an American monopoly in a major sector” 569 . In 1965,
France and the UK – joined one year later by West Germany – began negotiations about
collaborating on the development and production of a short-to-medium range, wide-bodied
commercial aircraft. In December 1970, Airbus was formed with significant political and financial
backing from France, Germany and the UK. Over the next decades, Airbus would successfully
challenge America’s supremacy in commercial aircraft manufacturing.
565 Ibid, p. 915
566 The title of a European bestseller published in 1967 by Jean-Jacques Servan-Schreiber who argued in favour of
transnational European cooperation to cope with “The American Challenge”, notably in the realm of business and
technology.
567 Golich (1992) pp. 915-916
568 Nau (1974) p. 12
569 Hayward (1986) p. 52
140

In the military aircraft domain, in contrast, America established the world’s most powerful and
technologically advanced A&D industry after the end of WWII. A global leadership position that
the country has (so far) successfully defended against all challengers. During the early stages of the
Cold War, the US shipped large amounts of surplus military hardware – including aircraft, tanks,
etc. – to its Western European allies to deter any further potential Soviet (military) expansionism.
These arms transfers – based on the Mutual Defence Assistance Act (1949) and the Mutual Security
Acts of the early 1950s – were either for free or sold at steep discounts. Total US military and
economic aid amounted to about US$45 billion between 1946 and1966. By 1958, according to one
estimate, about half of the heavy military equipment used by European NATO members was either
from the US or Canada. 570 The US-led NATO alliance also tried to promote the rationalisation 571 ,
standardisation, and inter-operability (RSI) of weapons systems among its members. For a long
time, however, NATO’s RSI efforts were essentially a “one-way street”, leading from America to
Europe. Deteriorating US balance of payments deficits, Europe’s resurgent economies, but also the
Vietnam War and France’s military withdrawal from NATO led Congress and various US
administrations to repeatedly push for a more balanced “burden-sharing” within NATO. To put it
differently, “the view that geopolitics was more important than mere trade and economics matters
was increasingly challenged from within the US government” 572 . In particular, Washington
(Congress above all) sought to encourage the European alliance members to take on more
responsibility for their own security by cutting back the generous US military and economic
assistance provided to them during the early stages of the Cold War. “Congress, from the earliest
year of the Atlantic Alliance, has attempted to control, where possible, the extent of the American
commitment to the alliance while lobbying for increased European defence efforts.” 573 Congress
and US administrations were also the target of lobbying efforts by the US defence industry to
exclusively reserve the country’s continuing financial assistance for those nations that bought or
produced American weapons systems. 574 From the perspective of Europe’s A&D industry, “the
[US] changed its position from ‘patron saint’ in the 1950s to ‘most active competitor’ in the early
1960s” 575 .
570 Beer (1969) p. 148
571 “‘Rationalisation’ [encompasses] all actions taken to use equipment and perform common tasks more efficiently and
cost-effectively”. ‘Standardization’ involves the adoption of common equipment, doctrine, and procedures by all
members of the alliance. ‘Inter-operability’ refers to compatibility of equipment and inter-changeability of parts, fuel,
and ammunition.” Taylor (1982) p. 95
572 Larres (2000) pp. 127-145
573 Sloan (1985) p. 397. Sloan analyses Congressional efforts to push for more European “burden sharing” and the
resulting transatlantic tensions with various US administrations (as well as tensions between US administrations and
Congress). US administrations were generally much more concerned about the negative geo-strategic consequences of a
weakening NATO alliance than the Senators and Congressmen driven by constituent interests.
574 Taylor (1982) p. 99
141

By the 1960s, Western European countries began insisting on co-producing US military aircraft
under licensing agreements, thus breaking with their habit of simply importing finished products
from America. One of the most prominent programmes was the co-production of the Lockheed F-
104G “star fighter” by a consortium of German, Italian, Belgian, and Dutch starting in the 1960s.
Germany’s decision to order the Starfighter and not France’s competing Dassault aircraft was
heavily influenced by the very attractive conditions proposed by F-104 manufacturer Lockheed,
which offered “substantial technology transfers and, of course, joint production of the aircraft” 576 .
Due to this aggressive US weapons sales campaign beginning in the early 1960s – aptly dubbed
“Win the Game in Europe by Managing Problems, Organising Sales Effort” by then-US Defence
Secretary McNamara – “US dominance in NATO weapons markets was maintained, even as the
[US] was sharing technology and production techniques with potential competitors” 577 .
By the mid-1960s and early 1970s, however, Western Europe’s major industrial powers decided to
design and manufacture their own military aircraft instead of importing or co-producing US
hardware. The rise of Europe’s aeronautics industry from the ashes of WWII illustrates how France,
the UK and Germany were gradually able to climb up the “ladder of production” 578 of weapons
systems, moving from 1) simple maintenance and overhaul of imported weapons; 2) licensed
foreign weapons assembly; 3) co-production; to 4) co-development; and, finally, 5) independent
R&DP of sophisticated weapons systems. 579 “Each country [France and the UK] continued to have
independent strategic interests outside the NATO orbit, and both viewed a vibrant defence industry
as critical to overall technological and industrial development.” 580 Germany, too, had strong
incentives to choose European over transatlantic defence collaboration:
“Having cooperated with the [US] [throughout the 1950s and the early 1960s] to rebuild
the German aircraft industry at a surprisingly high technical level, close to that of the
French and British industries, […] it was [now] in German interest to turn away from
America to cooperate with France or Britain. With either of these countries Germany could
cooperate in a nearly equal partnership, pooling resources and gaining know-how to
produce military aircraft to be purchased by both countries.” 581
575
Ibid., p. 99
576
Kapstein (1991-1992) pp. 661-662
577
Ibid., p. 661
578
For an overview of different “ladders of production” models see Blitzinger (2003) pp. 16-17, 35.
579
Smaller countries like Belgium and the Netherlands preferred the (cheaper) co-production of US aircraft. (Lorell et
al., 2003) pp. 50-55
580 Ibid., pp. 662-663
581 Milosch (2006) p. 152
142

Most of the defence projects were based on intra-European collaboration, including the British /
French Jaguar Jet (1965) and Lynx helicopter (1967), the British / German / Italian Tornado bomber
(1968), and the Franco / German Alpha Jet (1969). France (to demonstrate its independence from
America / NATO) and Sweden (to preserve its neutrality), each decided to manufacture indigenous
military aircraft. Even in those instances where France participated in transnational defence projects
it was important for Paris to be in the driver’s seat (with regard to weapons design, etc.) to
underline its political and military leadership role in Europe and because its leaders clung to the
concept of sovereignty maintained through the subordinate assistance of others. 582 While de Gaulle
was the driving force behind France’s ambitions to take the technological lead in key strategic
industries such as A&D or nuclear technology, the French President continued to put the main
emphasis in those sectors on purely national programmes: 583
“In the aviation and space sectors, French and British industries share the lead, with
France holding the advantage in airframes and the [UK] in engines […]. These [two]
industries have developed a number of projects cooperatively, including the Concorde,
Jaguar, Martel and three helicopter aircraft (Lynx, Puma, and Gazelle). In all but one
(Lynx), France exercised design leadership [and sabotaged UK efforts in design
leadership]. Although an even fifty-fifty division of workload has been observed in these
projects, British industries have criticised the tendency to leave design leadership to
[French] partner firms. Similarly, France sought to reduce dependency on British engine
leadership by encouraging SNECMA […] to collaborate with [GE] […].” 584
The cooperation between SNECMA and GE on aircraft engines is an interesting point in case. 585 It
clearly illustrates how Paris at times preferred being in a junior partnership with the Americans
(GE) rather than agreeing to a collaborative venture with a European partner (in this instance Rolls-
Royce) where France would not have been in the driver’s seat. In general, the French engaged in
European collaboration when they were the accepted project leader. If France had no other choice
but to be a junior partner, Paris opted for the deal that seemed to offer the greatest technology
582 “How could France hope to compete if scale and priority were critical in advanced technology? Many Europeans
concluded that the appropriate response to the technology gap was more vigorous integration. Only by pooling their
resources and talent might Europeans hope to forestall US hegemony. But this was not the Gaullist conception. France
did not flee dependence on America only to become dependent on a European mélange. Rather, France’s cooperative
[European] programmes in nuclear technology, space, and aviation (e.g., the SST) were fashioned so as to draw on the
resources of other in the interest of her national programmes rather than to donate French expertise in the interest of
multilateral progress.” McDougall (1985) p. 187
583 “The wartime hero de Gaulle rose to power just eight months after Sputnik 1. His mission, brooded over for twelve
years, was to save France. This meant military independence, without which no state was truly sovereign; economic
independence, without which no state was master of its own house; and technological revolution, without which no
modern society could maintain the first two conditions.” Ibid., p. 181
584 Nau (1975) p. 643
585 On the structure of the international aerospace engine sector, see (Skoens & Wulf, 1994) pp. 48-49
143

transfer. SNECMA started co-producing GE’s CF6-50 engine beginning in 1969, before both
companies agreed on the co-development of a turbofan engine. In 1974, SNECMA and GE
launched their 50-50 joint venture CFM International. The CFM-56 aircraft engines became a real
international bestseller, powering a wide range of commercial aircraft, including different Boeing
737 and various Airbus models. GE calls CFM “one of the great success stories in aviation history”.
However, the success of CFM is also a symbol of Europe’s weakness:
“When a national industry [in Europe] is weak relative to its European counterparts
(France in nuclear power or aircraft engines, Germany in aviation, Britain recently in
launcher technology, and France and Germany in computers) it regularly chooses to make
up this disadvantage through assistance from vastly superior American partners rather than
from more advanced, but less dominant European partners. As one writer observes,
European firms ‘distrust each other more than they dislike being dependent on the USA.’ 586
When firms are roughly equal in capability (French and British aviation industries),
cooperation is possible only on the basis of careful balance in financing, management and
work load. The net result of such cooperation is little specialisation and little gain in
efficiency or cost (the case with Concorde). In addition to this rivalry among major
industrial partners, a serious and, for the foreseeable future, continuing gap remains
between French, German and British industries on the one hand, and Italian and Benelux
countries on the other. Vertical and horizontal rivalries thus combine to leave Europe
vulnerable to American industrial initiatives.” 587
In 1968, the UK launched “Eurogroup” – an informal gathering of defence ministers from ten
European NATO members – in an effort to further advance European defence industrial
collaboration within the framework of the Alliance. The impact of this initiative was rather limited,
especially since France had left NATO’s integrated military command structure two years earlier
and decided to keep out of Eurogroup. One of Eurogroup’s early accomplishments was the
“Tornado” started by the UK, Germany and Italy that same year. However, it was not until 1976
that France and the Eurogroup joined forces to create the Independent European Programme Group
(IEPG), which was outside of NATO. Having just lost the “sale of the century” competition to the
Americans a year earlier, the French recognised that they had to cooperate more. While Eurogroup
“marked the real beginning of a European response to US dominance and the imbalance in
transatlantic arms transfers […]”, it was only “French participation [in IEPG] since 1976 [that] […]
586 Pavitt (1972) p. 211
587 Nau (1975) p. 645
144

greatly extended the range and scope of [European] collaborative programs” 588 . From its inception,
IEPG’s main focus was the promotion of European collaboration on defence R&DP, including
equipment standardisation. IEPG also hoped to increase European defence exports to America –
something that it largely failed to accomplish.
There were differing views within the US regarding Europe’s various attempts (Eurogroup, IEPG)
to invest in its own weapons systems. On the one hand, there was an expectation that these
European investments would expand NATO’s overall defence industrial base. On the other hand,
however, there were also concerns that “the overlap in [US and European] weapon systems 589 and
the lack of NATO standardisation resulted in a tremendous waste of financial resources and military
inefficiency that could prove fatal on the battlefield” 590 . There are two main schools of NATO
standardisation. The first camp, dubbed “the bigger-savings group”, made an economic case for
NATO standardisation, arguing that it would “save vast sums of money by eliminating duplicative
[R&D] and achieving economies of scale in weapons production”. 591 592 “Bigger-savings”
advocates pushed for the creation of a transatlantic “two-way street”, something that would “entail
[…] massive intra-alliance arms sales based on the economic concept of comparative advantage,
meaning that each country would specialise in the manufacture of the item it produces best”. 593 The
second camp, called “the better defence school” 594 , made a military case for NATO standardisation,
arguing that it reduces the Alliance’s vulnerabilities and improve its capabilities. 595 “[N]on-
standardised armies require unique and separate supply lines, making wide-ranging manoeuvres
difficult”. “Such armies must stock different types of spare parts: their logistics are therefore
complicated and the number of support troops they require is wastefully large.” 596 597 The “better-
defence” advocates were pushing for “joint US-European development and co-production of
weapons systems” 598 .
588
Kapstein (1991-1992) p. 663
589
By 1974, NATO already suffered from a high degree of duplication as the Alliance members operated 23 different
fighter aircraft, seven different battle tanks, etc. Taylor (1982) p. 97
590
Kapstein (1991-1992) p. 664
591
Cohen (1978) p. 75
592
Callaghan (1975)
593
Cohen (1978) p. 75
594
Ibid., p. 75
595
“Even if the [US] has the best tank, the very best tank that we can buy, and even if that tank is produced at the very
best price that anybody could envision, and even if we buy three times as many as they are talking about buying right
now, and even if we put them all in NATO […] we are not going to have a strong conventional defence in NATO
because our flanks are going to be exposed.” Senator Nunn’s statement during a 1976 Senate hearing on the Army’s
XM-1 tank, quoted in Ibid., pp. 74-75
596
Ibid., p. 75
597
“One must not draw too great a distinction between the two main schools of NATO standardisation, the betterdefence
people and the lower-costs group. They live symbiotically, and it is unclear which group has a greater influence
on government policy.” Ibid., p. 75
598
Ibid., p. 75
145

Europe’s resurgent defence industry also increasingly challenged US dominance in military exports
to third (world) countries. 599 Defence companies on both sides of the Atlantic had traditionally
relied on exports to recoup rising R&DP costs, lengthen production runs, and drive down their
systems’ unit costs. In 1975, US Defense Secretary Schlesinger launched the “two-way street”
initiative:
“[T]o enhance NATO standardisation; encourage American and European technological
and industrial strength; encourage independent, competitive, national weapons programs,
increase US purchases of European military hardware; and increase European purchases
of US hardware on the basis of co-production” 600 .
However, while Schlesinger pushed for a “two-way street” in transatlantic defence procurement,
US aerospace companies were eager to maintain and even expand the established “one-way street”
by convincing the European allies to co-produce US weapons systems rather than support
competing independent European defence projects. 601 602 The biggest symbol of this American
“divide and conquer” strategy was the 1975 “deal of the century”, in which GD agreed with
Belgium, Denmark, the Netherlands, and Norway on the co-production of F-16 fighters. To sweeten
the deal, GD offered its European partners a technology-sharing programme, numerous offset
arrangements, as well as the opening of two assembly lines in Belgium and the Netherlands. The F-
16 deal effectively divided NATO’s European fighter aircraft market into three distinct segments:
1) the F-16 (Belgium, Denmark, the Netherlands, Norway); 2) the Tornado (UK, Germany, Italy);
and 3) the Mirage (France). As a result, “the F-16 came to be seen in the eyes of many European
industrialists and public officials (particularly in France) as a Trojan horse wheeled in under the
banner of the two-way street”. One must recognise that GD was not part of the US administration,
nor controlled by Washington. In fact, GD’s actions in Europe cut across US administration policy.
The Pentagon, however, could not control US aerospace companies, particularly given the support
these firms had built in Congress. Schlesinger’s “two-way street” turned out to be a one-way street
at best and a dead-end at worst. Eliot Cohen bluntly dismissed the viability of a “two-way street”
approach for NATO in 1978: “Historically, standardisation has occurred only in an emergency and
on the basis of a one-way street.” 603
599 Between 1967 and 1976, UK defence exports tripled and French arms sales increased eightfold. In contrast, US arms
exports “only” increased by about 40 percent (from a much higher baseline, of course). Taylor (1992) p. 99
600 Kapstein (1991-1992) pp. 664-665
601 Washington refused to buy the French-designed ROLAND air defence missile system.
602 “Many Europeans have merely sneered at standardisation, which they see as an American ploy to sell more weapons
to Europe”. Cohen (1978) p. 88
603 Cohen (1978) p. 85
146

In 1983, UK Defence Minister Heseltine became IEPG chairman and successfully pushed for joint
technology programmes and harmonised European staff targets. 604 In 1988, the IEPG launched an
“Action Plan on a stepwise development of a European Armaments Market”, designed to open
European defence markets to cross-border competition and to facilitate technology transfers. This
initiative was again driven by the UK, where the Thatcher government tried a “commercial
approach” to defence procurement, an ambitious goal that ultimately proved elusive given that
defence procurement is “the most nationalistic of all economic activities” 605 . So why has there been
so little success in NATO standardisation?
“The fundamental explanation is that economic competition among the NATO member
states, and related domestic economic concerns, have thwarted most RSI collaborative
security initiatives. While weapons standardisation can improve military effectiveness in the
[A]lliance and save billions of dollars in R&D costs and systems redundancy, it can also
mean loss of sales (particularly in third-country transfers) and of control of military high
technology for members of the [A]lliance. This is perceived frequently by government and
business elites as causing balance of payments deficits, loss of commercial transactions
between arms recipient and arms supplier, increases in unemployment in certain sectors of
the defence industry, and higher unit-production costs”. 606
Cohen identified the following US obstacles to a “two-way street”:
“On the purely political level, the representative nature of American government and the
geographic location of the defence industry guarantee opposition to the purchase of any
major weapon abroad. Particularly in a period of high unemployment, congressmen and
senators will protest vigorously against large defence procurements that help a foreign,
rather than a domestic, industry. […]
The doctrine of comparative advantage is not valid for US arms procurement. In any event,
the intrusion of politics will prevent free trade in weapons. Above all, it is unlikely that
Congress and the defence establishment will consent to large-scale imports of foreign
weaponry rather than co-production.” 607
604
(Walker & Gummett, 1989) p. 430
605
Ibid., p. 419
606
Taylor (1982) pp. 97-98
607
Cohen (1978) p. 78
147

“Any outright purchase [of foreign weapons] will have a dramatic effect on a nation’s
balance of payments and its arms industry, with obvious domestic political
608 609 610
consequences.”
After the end of the Cold War, the aggressive, and ultimately successful, lobbying efforts of US
mega-primes to tie up the military aircraft markets of Central and Eastern Europe came to
symbolise the enduring nature of the transatlantic “one-way street” as well as America’s dominant
political position within NATO. With world-wide military spending in a dramatic post-Cold-War
slump, Western defence firms (LMC, MDC, BAE / Saab, and Dassault) were eager to secure
lucrative export deals with prospective NATO members like Poland, Hungary, the Czech Republic,
Romania, and Slovenia. A February 1997 DoS report estimated the total cost of NATO enlargement
(to new and existing NATO members alike) – based on the assumption that “a small group of non-
specified Central European countries” would join NATO in the first tranche of enlargement [in
1999] – to be somewhere between US$27-US$35 billion during the 1997-2009 period. 611 Of this
sum, about US$10–US$13 billion would be spent on the future NATO member countries’ military
modernization and restructuring. 612 As one report critical of “this unnecessary and irresponsible
militarization” put it:
“NATO expansion has secured CEE 613 as a market for Western manufacturers by claiming
that NATO standards of interoperability should be met.” 614
“Despite statements by NATO officials that a military build-up will not secure membership,
[CEE] elites are being pressured into buying these weapons and weapons systems to
improve their chances of [NATO] membership.” 615
Most of these political pressures exerted on CEE countries have been tied to the aggressive
lobbying efforts by LMC and MDC vis-à-vis political decision-makers in Europe and America. In
particular, Bruce Jackson, LMC’s Director of Global and Corporate Development during 1993-
2002, came under a lot of scrutiny for his role in setting up the “US Committee to Expand
608 Ibid., p. 76
609 Even when America cooperated with Europe, “the DoD often simultaneously funded a competing programme to
meet the same military requirement. Moreover, the competing US national programme was typically in the [classified]
part of the DoD budget, meaning that the allies were unaware of its existence”. Grant (1997) p. 118
610 However, the failure of transatlantic “two-way street” / RSI efforts cannot be entirely blamed on Washington:
“European countries used multinational projects as a means of obtaining access to new defence technologies; they
simply added national requirements together rather than harmonising them, pre-selected ‘national champions’ for
project participation rather than allowing any competition among contractors, and rigidly applied the principle of ‘juste
retour’ […].” Ibid., p. 118
611 DoS (1997) p. 17
612 Ibid., pp. 16-20
613 CEE = Central and Eastern Europe
614 Ruecker (1997) p. 2
148

NATO” 616 , a not-for-profit organisation established in 1996. The Committee included a bipartisan
board of prominent political and business leaders 617 and targeted most of its lobbying efforts at the
US Senate, which ultimately had to approve any expansion of NATO. Critics charged that
Jackson’s dual role at LMC and the Committee constituted a clear conflict of interest:
Jackson’s advocacy work in the expansion of NATO and Lockheed’s arms deal with Poland
highlight the political and corporate linkages that make the NATO expansion both a matter
of strategic significance for the [US] and economic advantage for its arms
manufacturers. 618
Poland’s US$3.8 billion acquisition of 48 F-16s, a deal which was not finalised until early 2003, 619
620 proved to be particularly controversial as it pitted LMC against Dassault and the BAE-Saab
consortium. One argument repeatedly made by LMC and the US government vis-à-vis Warsaw was
that the F-16 acquisition would allow the Polish and US Air Force to develop common doctrine,
tactics and training procedures. The Bush administration and Congress played a key role in securing
the deal for Lockheed by providing Warsaw with an attractive US$3.8 billion loan through the
Foreign Military Financing fund. Poland’s F-16 purchase was sweetened with offset agreements
totalling US$6-US$8 billion. 621 622 623 Apparently, Washington and LMC also used Warsaw’s
interest in the future acquisition of the JSF fighter as a “carrot” during the F-16 competition. 624
LMC and Jackson strongly rejected any linkage between the F-16 sale and his Congressional
lobbying for NATO. They claimed that LMC never funded the Committee and that Jackson never
served as a registered LMC lobbyist. 625 Unnamed US and Polish government officials indicated that
626 627 628
Jackson “was always careful about avoiding conflicts of interests in his dual roles”.
615
Ibid., p. 1
616
The US Committee to Expand NATO” was subsequently renamed “US Committee on NATO”.
617
Robert Zoellick, Stephen Hadley, Peter Rodman, Sally Painter, etc.
618
Sennott (2003)
619
The F-16 deal coincided with the US-led Iraq War, which strongly opposed by France and Germany. When the F-16
accord was signed during a televised ceremony in April 2003, “top US and Polish officials described it as a precursor to
a strategic partnership, spanning the political, military and economic spheres”. Khadige (2003)
620
The production facility for the Polish F-16s was located in President Bush’s home state of Texas.
621
Poland required offsets covering at least 100 percent of the contract’s value. Wall (2003)
622
“The smaller profit margins that manufacturers are accepting due to no-cost leasing and offset agreements are
perceived as part of long-term strategies designed to secure product loyalty and establish market presence.” Ruecker
(1997) p. 4
623
LMC offered 17 different offset programmes totalling US$6 billion by 2013: 10 percent of the offsets were in
technology transfers; 20 percent in investments, and 70 percent were linked to purchases of Polish-manufactured goods.
IISS (2003) p. 246
624
According to a senior Pentagon official, US negotiators indicated that the F-16 acquisition would constitute “a
perfect first step to [Poland] eventually becoming an owner and operator of the [JSF].” Also, LMC’s offset manager for
the F-16 deal was quoted as follows: “What we told [Polish officials] is that it is not up to us to invite them to join JSF
[but it’s the prerogative of the US government]. However, with the F-16 you have developed a relationship with the
contractor and the industrial base building JSF.” Wall (2003)
625
Jackson (2009) and Sennott (2003)
626 Ibid.
149

France’s political and defence industrial circles as well as EC President Romano Prodi strongly
criticised Warsaw’s F-16 acquisition. 629 As Serge Dassault put it:
“Pourquoi chacun [en Europe] conserve-t-il le droit d’acheter n’importe quel matériel
militaire américain? Pourquoi pas d’obligation de ‘préférence européenne’ pour les
matériels d’armement? [...]
En réalité, les Américains cherchent par tous les moyens à supprimer toute concurrence en
matière d’armement et à affaiblir l’Europe. [...]
Ils ont des moyens de pression politiques, financiers, diplomatiques, militaires bien
supérieurs aux nôtres et lorsque nos avions sont choisis par les états-majors, les Américains
arrivent par des pressions politiques à faire basculer les décisions en leur faveur. A
continuer ce jeu de division, l’industrie européenne d'armement tout entière va devenir un
sous-traitant des Américains. [...] Seul tient encore tête le bastion français avec une
industrie aéronautique remarquable mais pour combien de temps encore?
Il serait indispensable que les pays européens se ressaisissent et imposent aux nouveaux et
aux anciens la préférence européenne.” 630
Romano Prodi:
“Certainly it’s displeasing that the day after the EU integration ceremony Poland signs a
mega-contract for the purchase of American fighters. […] Let it be clear that if one enters
the [EU] they enter a family. One cannot entrust his purse to Europe and his security to
America.” 631
627 The DoS claims that “The [US] and NATO discouraged most of [the CEE] requests [for assistance in acquiring US
combat aircraft] and counselled that [NATO] membership would depend more on political, military and economic
reforms than military acquisitions […]. DoS (1998) p. 20
628 One Hungarian official stated that „[Jackson] was never primarily a sales man but more of a strategic thinker”.
Dragsdahl (1998) p. 1. This statement implies that Jackson was a sales man, but not “primarily.”
629 Jakubyszyn (2003) provides a French perspective criticising the US export offensive.
630 Dassault (2003)
631 Prodi (2003)
150

4.2 The failed EADC 632 and BAe / DASA consolidation talks
Despite increased European collaboration in civil and military aircraft manufacturing starting in the
1960s and 1970s, Europe’s A&D industry remained “a jumble of national champions” well into the
1990s. 633 By moving from international cooperation to transnational integration, the EADS merger
marked a historical breakthrough for Europe’s A&D industry. In a way, EADS was the next logical
step, both from a political and business perspective. At the political level, the 1998 Franco-British
St. Malo summit’s goal of creating a European security and defence policy independent from the
US (and NATO) required the maintenance of a competitive defence industrial base. At the business
level, declining European defence budgets and skyrocketing R&DP costs made it imperative to pool
resources and achieve significant economies of scale. 634 Commenting about this “twin movement
toward greater Europeanisation of defence matters”, Nicole Gnesotto sees a reversal of roles:
“[I]t is no longer governments that are steering European cooperation on armaments but
industry itself that is moving ahead of political constraints and adapting them, precipitating
change and now acting as a driving force in the implementation of common defence.” 635
To be sure, important sectoral differences continue to exist. Land systems manufacturers and
shipbuilders remain predominantly organised along national borders. In contrast, the A&D industry
(EADS in particular) and the defence electronics industry have really advanced the farthest in the
drive towards European transnational integration. According to Gnesotto, “the creation of EADS
heralds a revolution in European industrial affairs whose political repercussions are also potentially
revolutionary”. 636 It should be noted, however, that EADS was just the “second-best” if not “third-
best” solution in the effort to achieve transnational consolidation in the European A&D industry.
EADS included only two of Europe’s big three players (France and Germany), but not the UK.
Initially, the “grand vision” was the creation of EADC comprising the four Airbus partners,
Finmeccanica, and Saab. 637
Since early 1997, Aérospatiale, DASA, BAe, and CASA had negotiated about the transformation of
their loose Airbus consortium into AIC (Airbus Integrated Company). Two events, however, led
these four companies to look beyond Airbus and consider not only merging their civilian but also
632 EADC = European Aerospace and Defence Company
633 The Economist (1997)
634 “In Europe, […] the major producers came to perceive intra-European cooperation as the only way to maintain
national capabilities, as it became economically imperative to share the rocketing costs of defence R&D. Given these
costs, intra-European cooperation gradually evolved into the only alternative to buying US equipment, and hence into
the only means of resisting US defence industrial and technological domination.” Grant (1997) p. 117
635 Gnesotto (July 2002) p. v
636 Ibid., p. v
151

their military assets into one company. First, the announcement of the BMD merger posed a serious
competitive threat to Airbus as it would enable Boeing to balance its highly cyclical civil aviation
business with MDC’s less cyclical defence operations. Second, on 9 December 1997, Prime
Minister Blair, Chancellor Kohl, and Prime Minister Jospin issued a trilateral declaration stressing
“the urgent need to restructure Europe’s A&D electronics industries” 638 . This consolidation process,
“expected to embrace major civil and military programs, should lead to European integration based
on balanced partnership” 639 . Over time, the consolidation would “help to improve Europe’s share in
the global market, promote European security and ensure that Europe plays a full role in its own
defence” 640 . The three leaders called on their respective “national champions” to develop “a clear
plan and timetable for action” by 31 March 1998.
Four days before the end of this ambitious deadline, Aérospatiale, DASA, BAe, and CASA
submitted a report outlining the founding principles for a potential future EADC. The report was
also shared with the Italian and Swedish governments and their “national champions”,
Finmeccanica and Saab. While this first report was received quite positively, the ministers of
industry from the six governments involved met in July 1998 and asked for a second, more detailed
report to be submitted as soon as possible. In mid-November 1998, the four Airbus partners along
with Finmeccanica and Saab put forward a second report and agreed on the following principles: 641
First, the ultimate goal of the restructuring and consolidation process would be the creation
of one, fully integrated A&D company: EADC;
Second, EADC should have the following core business lines: civil and military transport
aircraft; combat and military mission aircraft; helicopters; space launchers and orbital
infrastructure; satellites and satellites operation; guided weapons and defence and aerospace
systems;
Third, EADC’s corporate strategy should be guided, above all, by economic and financial
objectives – i.e., the maximisation of shareholder value. With this provision, privatised
companies such as BAe and DASA sought to limit potential political interference by
European governments through their respective (state-controlled) national champions; 642
Fourth, EADC should be run as one entity by one management structure responsible for all
of the company’s operations;
637
For an analysis of the EADC discussions, see Schmitt (2000) pp. 29-32
638
Sparaco (December 1997)
639
Ibid., p. 22
640
Ibid., p. 22
641
Schmitt (2000) pp. 30-32
642
Decisions concerning EADC’s allocation of R&DP facilities were to be made according to objective, competitionbased
performance criteria rather than the “principle of just return”.
152

Finally, EADC’s shareholder interests were to be protected by three principles. (1) No single
EADC shareholder should be able to gain control over the entire company; (2) EADC
should be protected against hostile takeovers (by third parties); (3) EADC’s dispersed
shareholders should not be at a disadvantage compared to the company’s large so-called
“block shareholders”, be they institutional or sovereign.
Ultimately, “the [EADC] discussions never reached the stage of real negotiations. They were
essentially an exchange of ideas and a general discussion of possible avenues to explore” 643 . While
the outlined points of agreement seemed pretty comprehensive, the six companies failed to come to
a consensus in three crucial areas. First and foremost, there was disagreement over how to merge
these six companies into one corporate entity, that is, through the “Airbus plus” option, an EADC
empty shell / holding company or via a “big bang” / “come as you are” merger. 644 Second, there
were differences over the potential EADC shareholder structure, pitting the fully privatised firms
BAe, DASA, and Saab against Aérospatiale, CASA, and Finmeccanica who were on track for
privatisation but, at the time of the EADC discussions, were still fully or at least partly state-owned.
In particular, there was no agreement over what, if any, equity stake the French, Spanish, or Italian
government would have in EADC. 645 Third, there were differences over whether or not to integrate
ballistic missiles (manufactured only by Aérospatiale) or regional aircraft (a business completely
abandoned earlier by DASA and Saab) into EADC. Finally, it was not clear how to potentially
include France’s Dassault into this consolidation process. 646
Despite all professions about the necessity of a comprehensive consolidation of Europe’s A&D
industry – and even the broad agreement on the basic structure and operating principles of the
future EADC outlined above – the “big bang” EADC consolidation & restructuring project proved
to be far too complex to implement to be more than just the subject of relatively theoretic corporate
strategy discussions in board rooms across Europe.
“The real question was who would get married first, and to whom. The stakes were very
high: for the small companies it was a matter of not being sidelined by a merger of the
large. For each of the large companies, it was essential not to allow itself to be isolated by a
merger of two of the others.” 647
643
Schmitt (2000) p. 30
644
For a detailed discussion of these merger options, see Ibid., p. 31
645
Ibid., p. 31
646
Ibid., p. 31. Dassault followed the EADC discussions but did not actively participate.
647 Ibid., p. 32
153

After the failure of EADC, France’s A&D industry was most at risk of being marginalized in the
European consolidation end game ahead. A bilateral link-up involving Germany’s DASA and the
UK’s BAe seemed now even more plausible, given that both defence groups were fully privatised
whereas France’s AM remained under partial state control. BAe and DASA had already been in
merger talks since early 1998, in parallel to the EADC discussions. 648 Both companies participated
in the Airbus and Eurofighter and also shared “the same business philosophy: shareholder value as
the absolute priority, and no state participation in the firm’s capital”. 649 However, BAe and DASA
also faced considerable obstacles in their efforts to join forces. First, with an annual turnover of
$11.6 billion in 1998, BAe was a third bigger than DASA, which had revenues of EUR8.7 billion.
Nonetheless, DASA firmly insisted on a “merger of equals” with BAe. 650 Second, there were
differences in the two companies’ shareholder structure. While BAe had a very fragmented
shareholder base, DASA was controlled by a single block shareholder (DCX). Many BAe
shareholders therefore feared that DCX would dominate a merged BAe/DASA company.
While the BAe/DASA negotiations reached an advanced stage and seemed to be close to a
successful conclusion in late 1998, the UK-German merger failed at the last minute when BAe got
the opportunity to become Britain’s undisputed “national champion” through the acquisition of the
UK defence electronics firm GEC-Marconi. Several factors explain this decision. First, the
acquisition of GEC-Marconi made BAE Systems the dominant player in the domestic UK defence
market, allowing it to capture 60 to 80 percent of the nation’s procurement business. Second, BAe
also hoped that by consolidating at the national level – as opposed to the European level – it would
increase or at least preserve its potential chance for a transatlantic merger with a US mega-prime.
Finally, given the pronounced disparities in size between the two companies, “DASA turned out to
be too powerful to be absorbed but also too weak for a merger as an equal partner with BAE.” 651
For DASA, BAe’s last-minute change of heart came as a big surprise and permanently damaged the
trust between the senior management of the two companies. 652 653 While BAe thought that the
acquisition of Marconi would just temporarily delay its merger talks with DASA, the Germans
expressed their strong opposition to the BAe-Marconi deal, which had resulted in vertical rather
than horizontal integration.
648
Ibid., p. 35
649
Ibid., pp. 34-35
650
The equity in the merged company would have been split 60-40 percent in favour of BAe. The Independent (1998)
651
Vlachos-Dengler (2004) p. 13
652
BAe chairman Evans called DCX CEO Schrempp to convince him to abandon the 1999 EADS merger, Evans was
reportedly told “We’re not interested. You have had your chance.” Industry watchers dubbed the EADS deal
“Schrempp’s revenge”. (Lorenz & Woodhead, 1999)
653
DASA knew that BAe wanted to acquire Marconi, but believed that such a deal would happen after the planned
DASA-BAe merger. Willcock (1998)
154

With combined annual revenues in 1998 of about EUR17.4 billion, the “New BAe” as it was first
called before being re-branded “BAE Systems” in December 1999, was far bigger than either
DASA (EUR8.7 billion) or AM (EUR11.6 billion). A transnational European merger between or
among equals involving BAe was therefore no longer politically feasible as it would have amounted
to a UK takeover of Germany’s and / or France’s “national champions”. 654 DASA wanted to be an
“equal partner” even though it was a smaller company. The Marconi purchase made BAe a
significantly bigger company, so DASA would clearly have been the junior in a merger. In deciding
to become the UK’s “national champion”, BAe had foregone the possibility to become a co-founder
of the first “European champion” in the A&D industry. However, the creation of BAE did raise the
spectre of privileged access to the American defence market and a potential merger with a US
mega-prime. 655 656 With the failure of the “second best” BAe-DASA merger solution, the way was
now paved for the “third best” solution in Europe’s desire to restructure and consolidate its A&D
industry: the Franco-German-led EADS.
654 In January 1999, DASA declared that the BAe-Marconi link-up “will make balanced European horizontal mergers
such as DASA-BAe impossible and create an obstacle to European integration”. Jones (1999)
655 Deputy Defense Secretary Hamre apparently told BAE CEO Weston in the fall of 1999 that the Pentagon would
treat his company like an American firm and that it would like to see large-scale transatlantic aerospace industrial
consolidation to boost competition in the highly oligopolistic US defence sector. Gow (1999)
656 LMC was best positioned to be part of a potential transatlantic merger deal because unlike Boeing, it was not
competing with the Europeans in commercial aircraft: “In essence, the key focus of LMC’s corporate strategy
discussions in the mid-to-late 1990s was about how we could potentially join forces with a major European firm in a
full-fledged transatlantic merger deal.” Jackson (1999). DASA also approached LMC for informal merger talks.
However, LMC refused to give DCX a 50-percent stake in the merged company. LMC (1999 revuenues: USD25.5
billion) was far bigger than DASA, making a “merger between equals” impossible. (Lorenz & Woodhead, 1999)
155

4.3 EADS and its founding companies: Aérospatiale Matra, DASA, and CASA
The EADS merger, announced in mid-October 1999, marks a historic breakthrough. For the first
time, three sovereign countries – France, Germany, and later Spain – decided to allow their leading
A&D companies – AM, DASA, and CASA, respectively – to merge into one fully integrated
company: EADS. 657 For sure, international cooperation on select defence projects was already quite
common during the Cold War. But prior to the EADS link-up, this cooperation had never taken the
form of full-scale transnational mergers involving core elements of the countries’ national defence
industrial base. 658 On 14 October 1999, Chancellor Schroeder and Prime Minister Jospin – flanked
by DASA CEO Bischoff and AM Chairman Lagardère – declared in Strasbourg that DASA and
AM would merge their operations to form EADS, the first pan-European A&D company. The
EADS merger “is good for France, good for Germany, and good for Europe”, argued Schroeder.
Prime Minister Jospin echoed the Chancellor and said that EADS would be “a powerful tool for
659 660
building a strong and unifying Europe who is the master of its own future”.
On December 2, 1999, Spain’s state-owned CASA decided to join forces with EADS. For one
thing, DASA had already been in advanced take-over talks with CASA for several months when the
Franco-German EADS merger was announced in October. Furthermore, AM, DASA, and CASA
were long-standing collaborators on several major A&D projects, including Airbus, Eurocopter,
Eurofighter, and Arianespace, which together accounted for 70 percent of EADS revenues. 661 Most
importantly, AM and DASA each held a 37.9 percent stake in the highly profitable Airbus
consortium. With the addition of CASA (4.2 percent stake), EADS controlled 80 percent of Airbus.
In 1999, EADS had pro-forma combined annual revenues of about EUR22.5 billion, making it
Europe’s biggest A&D group. Globally, EADS was the third largest A&D company, after Boeing
(US$55.4 billion) and LMC (US$26 billion), but before Raytheon (US$17.5 billion). In terms of
market share, EADS ranked among the world’s top two A&D companies in all of the following
business lines: commercial aircraft (#2), civil helicopters (#1), commercial space launch vehicles
657 The 1992 creation of Eurocopter, involving the merger of Aérospatiale’s and DASA’s helicopter activities, had
already resulted in a smaller and limited case of pan-European defence consolidation. Nevertheless, “Eurocopter
represents the first time that aeronautics companies from different European countries combined R&D and production
capabilities”. GAO (1994) p. 6
658 “[T]he essential security interests of member states referred to in [Art. 296 (ex Art. 223) of the EC Treaty] have
often been broadly interpreted in order to override the disciplines of Community policies”. Schmitt (April 2003) p. 10
659 China Business Information Network (1999)
660 The EADS press conference “was peppered with references to ‘our British friends’, although given the political spin
put on the deal it was unclear if that meant BAe or Blair’s government. In any case, the phrase hung in the air halfway
between a threat and an invitation.” French finance minister Dominique Strauss-Kahn declared: “This [EADS merger]
shows that Europe does not stop with a currency project. […] This is a day our British friends should take note of.”
(Lorenz & Woodhead, 1999)
661 EADS ( 2000) p. 9
156

(#1), and missiles (#2). Furthermore, EADS was one of the leading manufacturers of military
aircraft as well as of satellites and defence electronics. 76 percent of EADS revenues in 1999
derived from the civil sector, with 24 percent coming from military sales. 662 At the time of the
merger, EADS decided to divide its far-flung operations into five business lines: (1) Airbus, (2)
Military Transport Aircraft, (3) Aeronautics (other than Airbus and Military Transport Aircraft), (4)
Space, and (5) Defence and Civil Systems.
In 1999, Airbus accounted for pro-forma revenues of EUR12.6 billion, approximately 54 percent of
EADS’s EUR22.5 billion total turnover. At the time of the EADS merger, Airbus had already taken
off commercially and was on the verge of a major boost that would propel it ahead of Boeing, the
dominant force on the global market for large commercial aircraft. Between 1999 and 2004, Airbus
outsold Boeing in five out of six years. And in 2003, Airbus outperformed Boeing for the first time
in terms of actual deliveries. EADS’s Military Transport Aircraft Division (MTA Division)
manufactures light and medium military transport aircraft and is also responsible for the A400M
project designed to give European countries much-needed heavy strategic airlift capabilities. In
terms of revenue, MTA ranked as the smallest EADS division, with pro forma sales of about
EUR200 million in 1999. With the A400M, EADS hoped to be able to compete across the full
range of military transport aircraft, including the rapidly growing market for heavy transport
aircraft. 663 US competitors like Boeing’s C-17 Globemaster III or LMC’s C-5 Galaxy Starlifter
already play a crucial role in allowing a quick response to military crises or humanitarian disasters
world-wide. 664 The A400M has long been dogged by cost overruns and production delays, thus
raising serious political and financial questions about the overall viability of this defence
contract. 665 British scepticism over the A400M has risen as its costs have spiralled and delays
lengthened, while Germany, Spain, and Italy leased Ukrainian Antonov planes to transport troops
outside Europe. As for the UK RAF, it flies C-17s.
The EADS Aeronautics Division includes all of the company’s aeronautics activities outside of
Airbus and MTA, such as Eurocopter, Eurofighter 666 , military aircraft, regional aircraft, general
aviation aircraft, and aircraft maintenance and conversion. In total, the Aeronautics Division had
662
Ibid., pp. 7-8
663
“No single country, other than the US and the former Soviet Union, has ever built its own strategic military
transports or wide-body jetliners. Essentially, France has succeeded in creating this capability for itself by giving
programme shares to the rest of Europe.” Aboulafia (2001)
664
In principle, the A400M will also be equipped to serve as a tactical tanker aircraft, allowing its customers to
significantly increase the effective combat range of their bomber and fighter aircraft within a given theatre of
operations.
665
Most of the A400M’s problems are due to the fact that the plane is overweight and that the turboprop engines do not
provide sufficient thrust.
666
EADS has a 46 percent share of Eurofighter (BAE: 33 percent; Finmeccanica: 21 percent).
157

pro-forma sales of EUR4.3 billion in 1999, equivalent to 18.2 percent of total EADS revenues. 667
Eurocopter was created in 1992, when Aérospatiale and DASA merged their helicopter divisions. 668
With sales of EUR1.8 billion, Eurocopter ranked as the world’s #1 producer of commercial
helicopters and Europe’s #1 manufacturer of military helicopters. 669 Apart from Eurocopter, the
Eurofighter 670 is the other major part of the EADS Aeronautics Division. Launched in 1988 by
Germany, Italy, Spain, and the UK, the Eurofighter was designed to deliver a high performance
multi-role aircraft optimised for air superiority in complex air combat scenarios. Eurofighter
production began in 1998 and was scheduled to end by 2015. 671 According to EADS estimates in
1999, the Eurofighter consortium was expected (yet subsequently failed) to capture about 50
percent of the world’s total export market for fighter aircraft, then valued at 800 units worth more
than EUR50 billion over the next 30 years. 672
The EADS Space Division is the world’s #3 producer of space systems – such as satellites, space
launchers, and orbital infrastructures – after Boeing and LMC. In 1999, revenues of the EADS
Space Division were EUR2.5 billion (11 percent of total turnover). 673 At the time of the 1999
merger, EADS forecast substantial growth in the commercial satellite market as a result of projected
increased future demand for telecommunications services. 674 EADS also expected growing demand
for military communications and observations satellites in the wake of the Kosovo War, which
exposed Europe’s serious reconnaissance shortcomings. In navigation satellites, too, EADS forecast
substantial future growth, especially with regard to the “Galileo” navigation system. The AML 675
unit of EADS’s Space Division manufactures commercial space launchers and ballistic missiles. 676
677 678
667 EADS (2000) pp. 80-92
668 Ibid., pp. 81-84
669 During 1995-1999, 60 percent of Eurocopter’s revenues were generated by exports outside of France and Germany.
Ibid., p. 83
670 For more information on the Eurofighter, see EADS (2000) pp. 84-87.
671 By the time of the EADS merger, the Eurofighter consortium had already received 620 order commitments from the
four founding countries as well as Greece. Due to budgetary constraints, Eurofighter orders (and their weapons
equipment) would be scaled down significantly in subsequent years.
672 EADS (2000) p. 86
673 Ibid., pp. 93-99
674 Ibid., pp. 95-96
675 AML = Aérospatiale Matra Lanceurs
676 Through its stake in Arianespace, EADS is the lead architect of ESA’s Ariane space launcher programme. With a 50
percent market share of commercial space launches worldwide, Arianespace occupied the global top spot in 1999, with
a total of over 120 commercial launches since 1984. EADS (2000) p. 97
677 In general, the commercial space launch business is characterised by very high financial and technological “barriers
of entry”, which explains why the number of corporate players is limited to a small group of “national champions” such
as EADS in Europe, Boeing and LMC in the US, as well as select Russian and Chinese companies. The development
and production of space launchers require considerable technological expertise and up-front investments that are usually
conditional upon public funding, either from civilian or military sources.
158

Finally, EADS’s Defence and Civil Systems (DCS) Division comprises missiles and missile
systems, defence electronics, telecommunications, and services. 679 In 1999, the DCS had revenues
of EUR3.8 billion (16.3 percent of EADS turnover), making EADS Europe’s biggest missile
manufacturer and the #2 globally after Raytheon. 680 In terms of defence electronics, the DCS
division focuses on C4I capabilities, which provide military commanders with accurate, reliable,
real-time information about the positions and actions of enemy forces, both at the tactical and
strategic level. 681 682 Looking at DCS’s cutting-edge product portfolio and economic weight, it is
clear that this unit (along with Airbus) was critical to the future success of EADS. 683
EADS aimed to achieve cost savings of US$428 million a year by 2004 and to boost its operating
margin to 8 percent, up from 6.4 percent in 1999. 684 685 “Half of this will come from lower
purchasing costs, 30 percent will come from a reduction in the overall cost base – [R&DP] and so
on – 15 percent from new sales opportunities, and 5 percent from better financial engineering.” 686 In
this context, one must not forget that European aerospace companies made significant gains vis-à-
vis their US competitors in terms of operating efficiency, labour costs, and productivity during the
second half of the 1990s. 687 688 Furthermore, the sharp weakening of the Euro against the US dollar
in 1999 / 2000 provided European companies with additional competitive benefits over American
companies. 689 690 On the downside, aerospace experts pointed to costly long-term dollar hedging as
678
AML manufactures France’s nuclear tipped, submarine-based M4/M45 missiles.
679
EADS combined the missile activities of Aérospatiale Matra Missiles, Matra Défense, Matra BAe Dynamics (a 50-
50 joint venture BAE-EADS), and DASA’s LFK-Lenkflugkörpersysteme division.
680
In 1999, EADS forecast the global market for missiles and missile systems to grow from EUR12 billion in 2000 to
EUR14.5 billion in 2005 (20 percent growth rate). EADS (2000) p. 101
681
C4I capabilities are also crucial for maximising interoperability among allied and coalition forces through the
exchange of real-time data.
682
Major defence electronics competitors are: Thomson-CSF, BAE, Raytheon, LMC.
683
Prior to EADS, many of the missile activities of AMM, MD, MBD, and LFK were organized in various JVs, thus
promising future synergies derived from successful post-merger integration. Ibid., p. 103
684
Butterworth-Hayes (2000)
685
In 1999, Europe’s A&D companies averaged a 7-percent operating margin (like their US rivals). In 1998, the
European score was significantly lower (5 percent). AECMA statistics cited in Dowell (2000).
686
EADS spokesman quoted in Butterworth-Hayes (2000). The annual savings of US$428 million were to be broken
down as follows: Airbus: 50 percent; DCS: 15 percent; Space: 12 percent; EADS headquarters: 11 percent;
Aeronautics: 10 percent; Military Transport Aircraft: 2 percent. See Ibid.
687
By the third quarter 2000, unit labour costs in the US relative to the 11 Euro members were 38.5 percent above their
1987-99 average. Between the launch of Euro in January 1999 and the third quarter 2000, the depreciation of the
common currency alone had boosted the competitiveness of Euro zone producers vis-à-vis their international rivals by
18 percent (other factors include relatively moderate price and cost increases in the Eurozone, etc.). EC (2000)
688
“A closer analysis of the figures suggests that there have been three main reasons for the strong growth figures: a
dramatic improvement in overall productivity levels, the success of Airbus, and the start of the production phase of
large European military programs such as Eurofighter, EH101, Rafale, NH90, and Tiger.” Dowell (2000)
689
In 1999, the Euro depreciated 26 percent against the US dollar.
690
“The rapid recent decline in the value of the euro and the pound against the [US] dollar creates an opportunity for the
European aerospace industry to improve its competitiveness in the marketplace. […] If this currency exchange
advantage can be combined with a fast, cost-effective integration of the partners into EADS, the results could cause real
problems for its US competitors.” Butterworth-Hayes (2000)
159

well as “the expense and sheer complexity of integration” involved in the EADS and BAE mergers
691 692
as factors playing against the Europeans.
691 European A&D companies usually “hedge” against euro-dollar currency swings for an extended period of time (1-2
years) and do not fully benefit from a strong dollar until these hedging arrangements have expired. Ibid.
692 Analysts point to the poor stock market performance of EADS and BAE shortly after their respective mergers as
proof that “these integration complexities are proving tough to overcome”. Ibid.
160

4.3.1 Aérospatiale Matra (AM)
AM was created on June 14, 1999, when two French A&D companies – state-owned Aérospatiale
and privately-controlled Matra Hautes Technologies (MHT) 693 – decided to join forces. On the one
hand, the AM link-up was driven by the desire to create an internationally competitive French
“national champion”. On the other hand, in the words of AM Chairman Lagardère, the AM merger
was also designed to “signal a start to the restructuring of the European A&D industry – a
development in which we were determined to play the leading role.” 694 The French government’s
decision in December 1998 to transfer its 45.76 percent stake in Dassault – the highly profitable
manufacturer of the Rafale and Mirage fighters – to Aérospatiale had already led to a significant
“rapprochement” between the country’s leading aircraft manufacturers. 695 With the addition of
MHT, AM became a horizontally integrated company active in civilian and military aircraft,
helicopters, space, and telecommunications. By bringing its national A&D industry consolidation to
a logical conclusion, France wanted to make sure that AM would be a crucial player in any possible
European consolidation end-game: “un acteur incontournable sur la scene européenne”. 696
With 1999 sales of EUR12.9 billion, AM was the largest French A&D company and the biggest
EADS founder. Globally, AM ranked as the fifth largest A&D company, after Boeing, LMC,
Raytheon, and BAE. With an operating income of only EUR480 million, however, AM’s
profitability and operating margin of 3.7 percent (4 percent in 1998) was disappointing and clearly
lagged behind DASA and CASA. AM’s bloated workforce of more than 52,000 – most of it
unionised – accounted for the company’s high cost structure and its difficulties in adapting to the
post-Cold War slash in defence spending and weapons procurement. AM’s 1999 sales broke down
as follows: Airbus: EUR5.5 billion (42 percent of revenues); Other Aviation Operations: EUR0.85
billion (7 percent); 697 Dassault Aviation (AM held a 45.76 percent stake): EUR1.4 billion (10
percent); Eurocopter: EUR1.8 billion (14 percent) 698 ; Space: EUR1.5 billion (11 percent); Missile
systems: EUR1.2 billion (9 percent); and the Systems, Services, and Telecoms division: EUR0.86
billion (7 percent). The weight of civil and military sales in AM’s 1999 turnover was 76 percent and
24 percent, respectively.
693
MHT had three business lines: space, defence, telecommunications
694
AM (2000) p. 2
695
Dassault’s strategic decisions require a two-thirds majority vote by a steering committee where AM and Dassault
have equal representation.
696
Cambon (1997)
697
This division included the ATR regional aircraft JV with Finmeccanica.
698
Since AM held a 60-percent majority stake in Eurocopter, it was able to count the subsidiary’s full turnover towards
its annual revenues. DASA only counted 40 percent of Eurocopter’s sales towards its turnover.
161

On 13 January 1999, the French government issued a decree allowing for the privatisation of
Aérospatiale. Just two days later, the government signed an agreement with Jean-Luc Lagardère to
merge Aérospatiale with MHT to create AM. 699 AM’s official date of birth is 14 June 1999, ten
days after the company’s listing on the Paris stock exchange. While the French state’s stake in AM
was below 50 percent, the government retained a final say over AM’s strategic decisions like
potential M&As, spin-offs, etc. 700 701 In principle, AM was well positioned for the coming phase of
European A&D industrial consolidation, especially given its size and strong track record of
successfully participating in collaborative projects like Airbus, Eurocopter, and Ariane. That being
said, the French government’s 48 percent stake in AM would prove to be a major obstacle in future
merger talks with privately-controlled European companies such as DASA or BAE whose
management feared that political pressure from Paris could unduly interfere with AM’s corporate
strategy. 702 The close links between AM and the French government, particularly through the DGA,
meant that AM was likely to behave as a vehicle for French state and political interests as much as
or more than a profit-seeking corporation.
699 AM’s shareholder structure was as follows: French government: 48 percent; Lagardère Group: 33 percent; AM
employees: two percent; the remaining 17 percent of AM shares was distributed among institutional and retail investors.
700 “The [AM] Golden Share gave the government the right to: name a non-voting member to the board; approve any
new shareholding of 10 percent or more; approve any increase in an existing stake by 10 percent or more of the total
capital; and block the sale of any part of the shares if it would threaten [AM]’s control in ballistic missiles, laser,
nuclear, and armaments units.” Bialos (2009) vol. II, p. 344
701 “France must know on whom it can rely (both strategic and economic) and refuses to risk its national security by
allowing firms motivated solely by financial considerations, or foreign firms with different security interests, to steward
its major defence companies.” Ibid., p. 308
702 From an economic perspective, AM’s bloated workforce and low profitability made rationalisation / job cuts
inevitable. However, from a political perspective – especially against the backdrop of a newly elected Socialist
government – the implementation of such reforms seemed far too costly.
162

4.3.2 DaimlerChrysler Aerospace AG (DASA)
Prior to the EADS merger, DASA was the 100-percent-owned A&D subsidiary of DCX – itself the
creation of a major transatlantic merger between Daimler-Benz AG and Chrysler Corporation in
1999. DASA was founded in 1989, when Daimler-Benz took the lead in creating a German
“national champion” by consolidating the country’s key A&D firms into one single company,
DASA. The Cartel Office initially opposed the DASA merger plans, but dropped its most serious
anti-trust objections after Chancellor Kohl’s government provided strong political backing for the
deal. 703 The German government, along with key state governments such as Bavaria, facilitated the
creation of DASA by selling their remaining major A&D assets to Daimler-Benz AG. As early as
1990, then-DASA Chairman Juergen E. Schrempp – who would become CEO of Daimler-Benz AG
in 1995 and play a key role in the 1999 EADS merger – made it clear that his strategy was to make
the company “an equal partner in Europe, not a junior partner” 704 . When asked about DASA’s
longer-term future beyond Europe, Schrempp also expressed his desire to enter into “extended
partnerships” 705 .
1999 was the most successful year in DASA’s history. Revenues increased by five percent from
EUR8.7 billion to EUR9.2 billion, primarily driven by booming Airbus deliveries and a favourable
US dollar exchange rate. At the same time, DASA’s operating income rose by EUR107 million to
EUR730 million, an increase of more than 17 percent due to continuing efficiency and productivity
gains. 706 In 1999, DASA’s operating margin stood at 7.9 percent, more than twice as high as AM’s
comparatively low 3.7 percent margin. That year, DASA’s annual sales broke down as follows:
Commercial Aircraft (essentially Airbus): EUR3.3 billion (36 percent of total turnover); 707
Eurocopter: EUR705 million (8 percent); 708 Military Aircraft (Eurofighter, Tornado): EUR1.1
billion (12 percent); Space Infrastructure: EUR592 million (7 percent); Satellites: EUR458 million
(5 percent); Defence and Civil Systems: EUR1.7 billion (19 percent); and Aero Engines: EUR1.7
billion (19 percent). With annual R&D expenses of EUR2 billion (21.8 percent of turnover), DASA
ranked as one of the world’s most technology-intensive A&D companies. DASA had 46,000
employees in 1999.
703
Taylor (1990) p. 60
704
Mecham (1999)
705
Ibid.
706
DASA (2000) p. 4
707
Airbus accounted for more than 90 percent of DASA’s total commercial aircraft turnover prior to the EADS merger.
The remaining ten percent derived primarily from aircraft conversion (i.e., turning used passenger jets into freighters).
708
This figure reflects the consolidated DASA turnover figure according to its 40 percent stake in Eurocopter.
163

4.3.3 Construcciones Aeronáuticas SA (CASA)
While CASA was by far the smallest EADS co-founder, Spain’s state-owned aerospace company
was more profitable and efficient than DASA or AM. Like in the case of DASA, 1999 marked the
most successful year in CASA history. 709 Turnover rose to EUR1.2 billion (+ 20 percent), and
CASA’s operating income increased by 24 percent to EUR130 million in 1999, delivering a margin
of 10.7 percent. 90 percent of CASA’s 1999 revenues derived from aircraft sales; three percent
from its space activities; and seven percent from maintenance services. 70 percent of CASA’s sales
came from commercial clients; 30 percent from military customers. Prior to EADS, much of
CASA’s turnover derived from its stake in the Airbus (4.2 percent) and Eurofighter (14 percent)
consortia. CASA had 7,500 employees in 1999.
709 CASA (2000)
164

4.4 The Galileo Global Navigation Satellite System
The Galileo GNSS 710 marks an important milestone in Europe’s growing space ambitions and
clearly illustrates the French-led desire to cut its dependence on the existing American GPS
system. 711712 While Galileo’s origins date back to 1998-1999, it was not until November 2001 and
March 2002, respectively, that ESA and the EU joined forces and decided to each provide EUR550
million in funding for the development phase of the 30-satellite navigation system – now scheduled
to be operational in 2013. 713 While two-thirds of Galileo’s deployment costs (EUR2.4 billion) 714
were supposed to come from the European Galileo Industries consortium 715 , these plans fell through
in 2007, when the aerospace companies pulled out of the project, thus prompting the EC to step in
and save the struggling navigation system. Galileo is the largest technology project funded and
managed by the EU. 716
The motivations behind Galileo include a mix of political, economic, and technological factors.
Officially, the EC has described Galileo as “the first [GNSS] designed specifically for civilian use
worldwide”. 717 718 And for sure, given the rapid growth in GNSS-related (commercial)
applications, 719 Galileo’s business case appeared to be rather strong. 720 721 The UK, in particular,
insisted that all official Galileo-related publications stress the system’s commercial focus. 722
However, it is clear that military / geostrategic and technological motives loomed large when the
EU – pushed by France – decided to go ahead with Galileo. The EC compared Galileo to Airbus
710 GNSS = Global Navigation Satellite System
711 GPS = Global Positioning System
712 For up-to-date information about Galileo: http://ec.europa.eu/enterprise/policies/space/galileo/index_en.htm and
http://www.esa.int/esaNA/galileo.html
713 Initially, Galileo was set to be operational by 2008. However, the start date was subsequently postponed to 2013.
714 Galileo’s total cost of EUR3.5 billion breaks down as follows: EUR1.1 billion for the development phase + EUR 2.4
billion for the deployment phase. The original plan was for the EU to pay for the first four satellites, and industry to pay
for two thirds of the costs for the next 26 satellites.
715 Galileo Industries involved Alcatel Alenia Space, Thales, Finmeccanica, EADS Astrium (UK / Germany), and
several Spanish companies. After Galileo Industries pulled out in mid-2007, France lobbied hard to keep the satellite
system alive and managed to convince its fellow EU members to cover the EUR2.4 billion shortfall by using EUR1.6
billion from unused EU farm subsidies and funds from the EC’s technology budget. Taverna (2001)
716 Ibid.
717 EC (Space Cooperation EU-Russia)
718 This statement implied that Galileo would not be shut down during military crises.
719 Potential Galileo applications include public transport, aviation, energy, fishery, environment / science, law
enforcement, border patrol, etc.
720 According to a 2001 study by PriceWaterhouseCoopers, Galileo is expected to generate direct revenues of EUR 515
million per year (EC estimated annual operating costs of EUR 200 million). Together with Galileo’s broader economic
gains and positive externalities, the cost-benefit ratio reached 4.6 – an impressive benchmark for a public-private
partnership. The Economist (June 2002)
721 Galileo is not only attractive because it provides greater accuracy than GPS, but also because it features an integrity
signal that constantly informs users of Galileo’s continuity and reliability, making new commercial applications
possible. Taverna (2003)
722 London was trying to allay US fears about Galileo’s potential military / security applications and the challenge it
could pose to the US-controlled system – and thus to America’s GNSS hegemony. The Blair government was divided
165

and Ariane, both of which successfully broke US dominance in the commercial airliner and space
launch businesses. In that sense, Galileo is about organizing an effective EU-wide effort to allow
Europe to compete with the American hegemon in a crucial technology sector. 723 From the start,
Paris has been the key driving force behind Galileo, with most of the funding coming from
Germany. This has been precisely the French method for European collaboration since de Gaulle
and the 1960s: the French lead, and the Germans pay. In 2001 President Chirac sternly warned that
the abandonment of Galileo “would lead our country inevitably to a vassal status [vis-à-vis
America], first scientific and technical and then industrial and economic.” 724 France argued that the
Europeans should no longer rely on GPS as that navigation network was controlled by the Pentagon
and provided the foreign / non-military GPS users only with less accurate positioning data than
those used by the US military. 725 Furthermore, Paris was concerned that Washington could jam or
shut down certain parts of the publicly accessible GPS system during a military crisis in an effort to
deny its adversaries GNSS benefits. 726 Such a crisis-related GPS disruption could also have a
serious economic impact on legitimate third-party users in Europe and elsewhere. American
officials “have denied that the US government has ever turned off civilian GPS signals during any
conflict and underline that they do not intend to do so in the future”. 727 These assurances have done
little to allay European concerns. “The fundamental reason for creating Galileo was political and, at
some level, a distrust of the [US].” 728 France along with Italy, the third key Galileo backer,
therefore demanded that the system have an encrypted PRS 729 signal for use by European law
730 731
enforcement and security services.
over Galileo. The defence and finance ministries were skeptical whereas the industry ministry backed Galileo. The
Economist (June 2002)
723 “In technological terms: Galileo will enable Europe to acquire the technological independence that it wants in this
area, as it did with other initiatives such as Ariane and Airbus. It is vital that it should not be excluded from what is
already looking like being one of the main industrial sectors of the 21st century, which is how the Americans consider
it. Without Galileo, the development and even the survival of European new technology sectors would be under very
serious threat; with Galileo, the technological advance that the participating European industries will obtain will give
them a considerable competitive advantage in this sector […].” EC (2002) p. 4
724 James (2001)
725 “Select Availability” (SA) limited the public GPS signal’s accuracy to 300 feet. In 2000, Washington decided to
increase the public GPS system’s accuracy to 40 feet. The military GPS is much more precise, with a margin of error of
only several centimetres. “This decision was part of a larger effort to make GPS more responsive to civil and
commercial users around the globe. In good measure, this decision was driven by a fear that continuation of [SA]
created doubts about the willingness of the US to provide what had become a critical global infrastructure and acted as
an incentive for other nations to build their own satellite navigation systems.” Lewis (2004) p. 1
726 European media claim that Washington jammed the public GPS signal on a regional basis during the 1999 Kosovo
War. The denial of GPS to the enemy is an “asymmetric use” of GNSS. Giegerich (2007) p. 495. In recent years, the
US military had to strengthen its GPS signals to prevent enemy jamming.
727 Ibid., p. 495. “While this may perhaps be true, a distinction has to be made between turning off the civilian GPS
signals, on the one hand, and degrading them, on the other. The former is highly unlikely given that such a decision
would incur enormous costs to the US economy and would – at this stage of GPS’s development – also undermine US
military operations. The latter, however, is more likely, especially since improvements in GPS will offer a better
separation between military and civilian signals, thereby reducing the impact on US operations further.” Ibid., p. 495
728 Lewis (2004) p. 1
729 PRS = Public Regulated Service
730 The Economist (June 2002)
166

[T]he military implications of Galileo bring out significant divisions among EU member
states. France and the [UK] represent the opposite poles of the spectrum, with the former
strongly pushing for a military role for Galileo and the latter resisting such moves […].
Reports have suggested that France, with tacit support of the other main bankroller of
Galileo, Germany, has adopted a strategy for gradually expanding military use of Galileo
beginning in 2010 […]. 732
Despite its commercial applications, Galileo has been driven from the outset by strategic and
military motivations; i.e., the desire to provide Europe with strategic independence and greater
flexibility / autonomy from Washington in security and defence matters:
“It is crucial for Europe and the world as a whole to have a choice and not remain
dependent on the current monopoly of the American GPS system which is less advanced,
less efficient and less reliable. […]
[T]he EU wishes to develop, with Galileo, a system over which it has control and which
meets the need for accuracy, reliability and security. […]
Galileo will underpin the common European defence policy […]. There is no question of
coming into conflict with the [US], which is and will remain our ally, but simply a question
of putting an end to a situation of dependence. If the EU finds it necessary to undertake a
security mission that the US does not consider in its interest, it [the EU] will be impotent
unless it has satellite navigation that is now indispensable. Although designed primarily for
civilian applications, Galileo will also give the EU a military capability.” 733
America viewed Europe’s efforts to launch Galileo “with something between contempt and outright
hostility” 734 . For starters, Washington had serious doubts as to whether the EU would be able to
marshal the political will and financial resources necessary to implement such an ambitious
technological project. Furthermore, US officials saw no compelling need for Galileo given that GPS
system was free and would be modernised in the near future. 735 It was not until 2003 that US
731
Galileo will have 10 navigation signal channels: six will be open and free to the public; two are fee-based and
reserved for commercial users in need of more accurate signals; two PRS channels are encrypted and reserved for EU
governments.
732
Giegerich (2007) pp. 497-498. Giegerich also references Beidleman (2005) p. 130 and EUPolitix.com (2004).
733
EC (2002) pp. 1, 2, 4
734
John Pike from GlobalSecurity.org quoted in The Economist (June 2002).
735
Washington viewed Galileo as an unnecessary, wasteful duplication of GPS that would only divert already scarce
resources from Europe’s pressing military modernisation needs.
167

policymakers recognised that they could no longer prevent Galileo even if they wanted to do so. 736
At that stage, “Galileo seemed to US observers to combine the commercial competition seen in
earlier European initiatives, like Airbus or [Ariane], with an unexpected risk to a key US military
resource [GNSS].” 737 Washington had serious concerns that Galileo could fundamentally challenge
America’s GPS monopoly 738 , making it easier for potential adversaries like China to gain access to
advanced GNSS technology. 739 Above all, the Pentagon worried about the so-called M-code
overlay; i.e., the fact that Galileo’s encrypted PRS signal as well as parts of the open channels had
been assigned a frequency similar to the restricted M-code GPS III signal planned by the Pentagon
for future use by the US military and during NATO operations. This spectrum overlay would make
potential US jamming of Galileo’s signal much more difficult and even risked interfering with the
GPS M-code.
Washington regarded Galileo’s M-code overlay as a major national security threat and exerted
significant political pressure on its EU allies to make them back down and change their GNSS
frequency. In late 2001, then-Deputy US Defence Secretary Paul Wolfowitz sent a letter to all EU
defence ministers who were also part of NATO warning that Galileo’s M-code overlay with GPS
“will significantly complicate our ability to ensure availability of critical GPS services in time of
crisis or conflict and at the same time assure that adversary forces are denied similar capabilities”.
Wolfowitz went on to state that “it is in the interest of NATO to preclude future Galileo signal
development in spectrum to be used by the GPS M-code” and asked his European counterparts to
find out whether the EU intended to integrate “military features” into Galileo. “[I]f so, we must
examine […] the security implications […].” 740 Wolfowitz assumed that he could leverage Europe’s
top military establishment (many of which had long-standing ties to NATO and were part of the
same security community) to influence Galileo through the backdoor. However, rather than forcing
the EU to back down, the letter backfired and gave a boost to those countries which, like France,
had argued all along that Galileo was indispensable to guarantee Europe’s strategic independence
vis-à-vis America. 741 In 2003, a senior DoS official declared that “Overlay of M-code signals is not
736 Lewis (2004) p. 1. Prior to 2003, Washington proved “unwilling to accept the changes occurring in its European
partners” and failed to recognise that voices within the EU were calling “for an increasingly competitive transatlantic
relationship”. Ibid., p. 2
737 Ibid., p. 1
738 Russia’s GLONASS is a military GNSS which is currently not fully operational due to funding problems.
739 China’s EUR200 million investment agreed in 2003 proved particularly worrisome to Washington as Beijing could
potentially use Galileo to improve the accuracy of its ballistic missiles. Beijing is currently trying to build its own
“Compass” GNSS.
740 AFP (2001) referenced in Lewis (2004) p. 5
741 (Braunschvig, Garwin, & Marwell, 2003)
168

compatible with national security, weakens NATO capability, and is unacceptable to the [US].” 742
743
In June 2004, following months of tough negotiations taking place in the wake of the divisive 2003
Iraq War, the US and the EU finally reached a compromise agreement to resolve their
differences. 744 745 Most importantly, the EU agreed to switch Galileo’s open signals to a different
frequency – known as BOC (1,1) – which would also be shared with the civilian part of the future
GPS III. Earlier on, Brussels and Washington had already struck an informal agreement on the
separation of the M-code and Galileo PRS signal frequencies. 746 The EU also pledged to allow US
companies to build GNSS receivers that are compatible with Galileo. The US agreed not to jam
Galileo’s signals unilaterally, to share classified information 747 about the lessons learned from its
GPS programme so far, and to allow the EU to continue to optimise Galileo’s signals moving
forward. “The fundamental compromise behind the US-EU agreement is US acceptance of Galileo
as an independent satellite navigation system in exchange for EU acceptance of US security and
commercial concerns.” 748
While the compromise was hailed by both sides as a win-win outcome, it is fair to say that
Washington obtained more important concessions from Brussels than the other way around. The EC
did accommodate Washington’s key concern about the potential M-code overlap by changing
Galileo’s open signal frequency and, in return, received little more than conditional US blessings
for a project that Washington was no longer able unilaterally to prevent from going ahead
anyway. 749 Of course, the fact that the EC was legally empowered to negotiate with the US on
behalf of all EU members “severely limited [Washington’s] ability […] to rely on tested negotiation
techniques such as divide and rule and venue-shifting (i.e., conducting negotiations through
[NATO])”. 750 751 However, for the EC to maintain support for Galileo among Atlanticist members
742
Giegerich (2007) p. 501
743
For an analysis of the key Galileo issues that threatened US interests (i.e., spectrum overlap, mandatory use
requirements / market access, potential military use, and European defence spending priorities), see Lewis (2004) pp. 4-
7.
744
(Wall & Taverna, 2004) and “Agreement on the Promotion, Provision and Use of Galileo and GPS Satellite-based
Navigation Systems and Related Applications”:
http://ec.europa.eu/transport/galileo/doc/2004/2004_06_21_eu_us_agreement.pdf
745
Giegerich (2007)
746
(Wall & Taverna, 2004)
747
“The specific areas of American knowledge that were open to Europeans included the hardening of satellites to make
them resistant to high levels of radiation in space, software and operating procedures relating to ground control of
satellite constellation, as well as the lessons learnt over the operation of atomic clocks in space. The carrot, in short, was
that European time and money could be saved through learning from the US experience.” Giegerich (2007) p. 502
748
Lewis (2004) p. 8
749
A technological breakthrough by German and French scientists in late 2003 made it possible to keep Galileo’s
original encrypted PRS frequency while avoiding any M-code interference.
750
Giegerich (2007) p. 492
169

like the UK it was important to avoid a full-fledged clash with Washington and to make a good-
faith effort to find a compromise solution acceptable to everyone:
“Europe and the US are at a decision point for activity in space. The evolution of a common
European security and defence identity creates both challenges and opportunities. Absent a
clear vision on how to move ahead, a diminution in transatlantic cooperation is possible.
This outcome would not serve the interest of either Europe or the US. It is still unclear if the
agreement on Galileo / GPS compatibility was a last gesture of a declining transatlantic
partnership or the beginning of a new model for cooperation […].” 752
According to Michael Gleason, “the Galileo programme has survived because of subtle changes of
emphasis among the motives driving it”. 753 Accordingly, the 1999 EU decision to back Galileo’s
“definition phase” was primarily driven by “liberal factors at the international level”: 754 in
particular, Gleason identifies the anticipated GNSS benefits for EU communications and
transportation networks as the primary motivating factors behind Galileo. In contrast, the EU’s
2002 decision to approve Galileo’s “development phase” was above all driven by realist
motivations. ESDP, the Euro, and the 9/11 attacks are important factors explaining “that European
decision-makers were beginning to see the EU as responsible for independently protecting its self-
interest in the anarchic global environment”. 755 756 The June 2004 EU-US accord was again
primarily motivated by “liberal factors at the international level”. 757 Specifically, European and US
decision-makers decided that international cooperation, leading to better for efficiency for both
GNSS projects, was the best strategy for all actors involved. Finally, the all-important June 2007
EU decision to keep Galileo alive by funding it exclusively through EU public funds was again
dominated by realist factors:
“Growing insecurity in the world, as a weakened [US] became bogged down in Iraq, NATO
751
Washington treated the Pentagon-run GPS network as a vital national security matter. In Brussels, Galileo was
“handled by transport ministers and [EC] bureaucrats with no mandate for, or experience of, dealing with the life-ordeath
issues of geopolitics and war”. The Economist (June 2002)
752
Lewis (2004) p. 11
753
Gleason (2009)
754
Ibid., p. 13
755
Ibid., p. 14
756
“Between 1999 and 2002, the EU took a number of steps which make it more valid to consider the EU analytically
“as if” it were a state actor in the international arena. The development of [ESDP] along with the development of an
[ERRF], the Lisbon Strategy to make the EU the most competitive knowledge-based information economy in the world,
and the economic integration of Europe with the euro are some of the factors which indicate that European decisionmakers
were beginning to see the EU as responsible for independently protecting its self-interest in the anarchic global
environment. The terrorist attacks on America on September 11, 2001 and European discomfort with the unilateralist
Bush administration also contributed to European decision-makers’ desire to develop independent PNT [Positioning,
Navigation, and Timing] capabilities in order to bolster Europe’s political autonomy, security, and economic
competitiveness.” Ibid., pp. 14-15
757
Ibid., p. 15
170

lost ground in Afghanistan, Russia demonstrated the ability to squeeze European energy
supplies, and the Chinese successfully tested an anti-satellite weapon, insured that
European decision-makers’ assessments of the need for Galileo were heavily influenced by
758 759
realist factors.”
The fact that France was (again) the decisive force behind Galileo at its most critical decision point
in June 2007 thus lends credence to the nation that Paris, more than any other European
government, pursued a strongly realist and national-interest based foreign and security as well as
aerospace industrial policy. The Galileo / GPS episode strongly supports the realist approach and
interpretation embraced by this thesis. For Washington, GPS was a national security issue: US
control over the only operating GNSS reinforced American hegemony in NATO. The French, in
contrast, who at the time still remained outside of the Alliance’s IMS, were determined not to
accept this position of strategic dependency long-term. 760 While Gleason argues that during the
1999 “definition phase” Galileo was primarily driven by commercial motivations, there can be no
doubt that for France, military and strategic considerations topped the Galileo agenda – though the
civilian GNSS applications were used to get Germany and the UK on board as both countries were
concerned about Galileo’s impact on relations with Washington.
758 Ibid., p. 15
759 “Indicators that realist factors were exerting strong influence in European decision-makers’ assessment of the global
environment include the EU adoption of the “European Security Strategy in 2003, the founding of the [EDA] in 2004,
the announcement that two 60,000 strong EU Battle Groups had become fully operational in January 2007, the
activation of the EU Operations Center in June 2007, and the conduct of ten EU operations outside of Europe ranging
from purely military missions, to policing, to security institution building, and involving roughly 10,000 EU personnel
in 2006 alone.” Ibid. p. 16
760 There is anecdotal evidence that a US intelligence team went to brief French President Mitterand on Saddam
Hussein’s WMD programmes and handed him satellite photos of suspected sites. At the end of the briefing, the US
team asked for them all back, packed them away and left. Mitterrand was said to have been furious at this kind of
humiliating treatment by the Americans.
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4.5 France’s unique approach to the aerospace and defence industry
“More than any other country, France has a holistic view of its national identity. The
government, the people, the language, and even the wine are inextricably linked. The
country’s aerospace industries are part of that holistic image. They represent an investment
by the state, on behalf of the people, designed to enhance their national security, economic
gain, and national prestige.” 761
This section contrasts the different approaches adopted by Europe’s major powers – France,
Germany, and the UK – in dealing with their respective A&D companies and analyses how the
interplay with each country’s foreign and security policy has shaped this strategic industry sector.
Paris, driven by Gaullist and neo-Gaullist ambitions, made it a priority throughout the Cold War to
maximise its national autonomy in military and security matters. Therefore, France pulled out of
NATO’s integrated command structure in 1966, a highly symbolic move that would not be reversed
until the Alliance’s 60 th anniversary summit in 2009. France also refused to succumb to the
“American temptation” and simply import or co-produce (generally cheaper) US-made aircraft and
other advanced weapons systems for fear of becoming militarily and politically dependent on the
American hegemon. Paris was ready to commit considerable resources to develop and maintain an
advanced, autonomous indigenous defence industrial base backed by strong export promotion
policies supporting France’s foreign and security policy objectives. 762 763 764 And even when France
did engage in cross-border defence cooperation with countries like Germany or the UK to share
costs and benefit from an enlarged home market base, etc. it was clear from that Paris would insist
on overall design leadership. While exponentially rising R&DP costs of advanced weapons systems
pushed France towards closer collaboration with its European neighbours, Paris nonetheless did not
want to give up its long-standing claim to a leadership role in the creation of “Europe puissance”: a
politically strong Europe capable of autonomously defining and protecting its interests vis-à-vis
other relevant players in the international system, including the US.
761 Aboulafia (2001)
762 To defray the skyrocketing R&DP costs for advanced French-made weapons systems, Paris has pursued an
aggressive export promotion and political lobbying campaign vis-à-vis potential foreign customers. “In France, […]
export revenues are far higher than domestic sales […] [and] the military has expressed concern that export demand,
rather than the needs of the armed forces, drives arms production.” Neuman (2006), p. 431
763 “[I]t becomes clear that few activities permeate and penetrate French political and economic life more than the sale
of military technology and arms – and few are more important. Distinguishing between foreign and domestic policy as
the primary source of French [defence sales] conduct, therefore, has little or no relevance. Moreover, the guns or butter
dichotomy normally used by analyst to explain or condemn arms sales has been transformed in the French context into
an imperative of guns and butter. For most French within the government and bureaucracy concerned with arms sales,
and many within the opposition, the security and foreign-policy functions of the government, on the one hand, and
popular expectations of its responsibilities for welfare, on the other, are more joined than at odds. Kolodziej (1980) pp.
54-55
172

France – backed by German financing and technological know-how – also played a decisive role in
the launch of Airbus, which occurred not long after “Le défi américain” had alarmed Europe’s
political leaders about the growing economic, political, military, and technological power
imbalances between America and its allies on the Old Continent. However, France could also be
quite selective when it came to promoting defence industrial collaboration in Europe. Paris refused
to join Eurogroup / IEPG until 1976; eight years after the launch of this UK-led initiative. Once
France had joined IEPG, European cross-border defence industrial collaboration did receive a major
boost. For the strategically minded French government, GD’s 1975 F-16 “sale of the century”
certainly served as an important reminder that closer intra-European collaboration was the only
answer to confront the American hegemon and its aggressive defence export offensive.
While France has traditionally put a premium on pursuing an independent security and defence
policy and tried to foster European autonomy in strategic affairs, Paris was eager to avoid being
isolated within the EU, specifically in relation to the possibility of a potential German-British
defence industrial “axis” emerging in the mid-1990s. 765 BAe and DASA were known for following
an “Anglo-American business model […] putting profit ahead of market share and business
volume”. 766 “From the standpoint of France, countries and companies that followed the Anglo-
American way of thinking were encircling France, trying to convince them of the error of their
French ways.” 767 When the planned DASA-BAe merger risked leaving the French A&D industry
out in the cold, Paris dropped its opposition to the privatisation of Aérospatiale, engineered a
merger with MHT to build AM, and agreed to limit the government’s stake in EADS to 15 percent
in a concession to the Germans. Once France realised that its “maximising-national-autonomy”
approach was no longer viable, the government changed course and adapted to the new defence
industrial realities and necessities. 768 This adjustment in France’s A&D industrial strategy was
764
“Since France relies on arms exports not only to sustain its domestic industrial base but also as an instrument of
foreign policy, it also seeks to maintain export flexibility and avoid the need to get permission from another nation to
modify, deploy or export systems and / or technologies.” Bialos (2009) vol. II, p. 308
765
“We would regret [the impact] of a bilateral [BAe-DASA] consolidation move. France’s political leaders and
industrialists clearly have a preference for a 3-company [Aérospatiale-BAe-DASA] merger. […] The current discord is
injurious but the latent situation is worse. Exclusive of combat aircraft, we share most of our businesses [with the UK
and Germany] and I don’t understand the logic that could lead to a 2-player-only merger. […] If it happened, we would
react. The turmoil of the last 6 months impedes sound decision making.” Aérospatiale executive quoted in Sparaco
(December 1998)
766
Aboulafia (2001)
767
Ibid.
768
France’s defence-industrial establishment had already realised in mid-1997 that the country’s A&D electronics
players risked falling behind their European and US competitors unless Paris abandoned its goal of creating a super
national champion by merging Aerospatiale, Dassault, and Thomson-CSF. First, Dassault rejected such a big-bang
merger. Seond, Paris recognised that a French state-controlled super national champion would scare away other
European partners and push Germany and the UK towards a BAe-DASA merger. French A&D industrial leaders feared
the country’s encirclement at the hands of rapidly-consolidating foreign competitors. Ultimately, Paris decided to
173

initiated by Socialist Prime Minister Jospin after his election in 1997. Unlike their conservative
predecessors, Jospin and finance minister Strauss-Kahn were willing to go beyond the confines of
Paris’ long-standing neo-Gaullist approach and opted for the (partial) privatisation of key state-
controlled assets like AM to pave the way for pan-European A&D industrial consolidation.
“Ironically, the left-wing coalition of French Prime Minister Lionel Jospin, which came to
power in 1997, rapidly formulated a more realistic industrial policy than its right-wing
predecessors. Jospin and then-Finance Minister Dominique Strauss-Kahn devised
pragmatic guidelines including subtle compromises such as the partial privatisation of
state-controlled companies. In July 1998, they readily endorsed the surprise Aérospatiale /
[MHT] merger set to combine the state-owned aerospace company and the Lagardère
group’s defence arm into a shareholder-value-driven enterprise. This milestone, which
reconciled market forces with the ‘new left’, radically changed the course of events and
installed new actors on the aerospace stage.” 769
“In short, France’s aerospace policy consists of preserving industrial assets from the
ravages of market capitalism. But globalisation, the end of the Cold War, and numerous
other factors have forced the country to retrench and reconsider the extent of its aviation
industry commitments.” 770
France’s goal to avoid a bilateral German-British link-up and its decision to throw its weight behind
a Franco-German AM-DASA merger instead stands in stark contrast to the strategic industrial
policies – or weakness thereof – pursued by either London or Berlin. Prime Minister Blair was
furious about the BAe-Marconi link-up as he feared that this “UK first” deal could antagonise
DASA and permanently dash Britain’s prospects of being part of any future pan-European defence
industrial consolidation. 771 772 Blair’s preference for a cross-border European A&D merger was part
of his desire to keep the UK actively engaged in EU affairs – in spite of London’s refusal to adopt
the “Euro”. At the same time, however, a government pursuing a realist, national-interest based
A&D industrial strategy would probably have opposed the BAe-DASA merger and pushed for the
creation of a BAe-Marconi British “national champion” instead. After all, the “UK first” deal
brought Britain’s “two prime contractors together in an alliance spanning both military platforms
pursue a dual-track strategy by promoting AM and Thomson-CSF / Thales as separate French A&D champions. Le
Boucher (1997)
769
Sparaco (July 2000)
770
Aboulafia (2001)
771
Harrison (January 1999)
772
London made it very clear to BAe and Marconi that their merger would not escape a thorough anti-trust review.
Walters (1999)
174

and the combat systems that go on them” 773 . BAe strongly emphasised that the Marconi merger
served Britain’s national interests: “Up until now, foreign defence contractors have been able to
play BAe off against GEC [Marconi] to their advantage. This [merger] stops that game.” 774
Ultimately, the UK government did accept the BAe-Marconi deal as none of the other potential
alternatives under consideration at the time – i.e., a BAe-DASA link-up or a Marconi merger with
Thomson-CSF, LMC or NGC – came to fruition. 775 While Paris failed to secure a Thomson-CSF
merger with Marconi, London allowed the French to take over UK defence electronics company
Racal in a GBP1.3 billion all-cash deal. 776 The Blair government had actively encouraged
Thomson-CSF to bid for Racal to boost competition in the UK defence procurement market.
Furthermore, in a move that sparked a domestic political backlash, the Blair government even
seconded the deputy head of the UK defence procurement agency to Thomson-CSF to help
integrate Racal, boost the French firm’s competitive position vis-à-vis BAE, and increase the
company’s profile in the US. 777 These examples clearly demonstrate the lack of French-style realist,
national-interest-based strategic thinking in London’s A&D policy. The UK government adopted a
hands-off, laissez-faire approach which deliberately minimised state interventions in the A&D
industry based on the belief that the private sector and competitive market forces were ultimately
the most effective drivers of technological innovation and economic dynamism. For sure, the
British MoD imposed security restrictions to protect Racal’s classified information and retain a say
over the company’s future strategic orientation. 778 However, it is doubtful that Paris – unlike
London – would have ever authorised a foreign firm to take-over of a cutting-edge, Racal-type
French defence company. The Racal take-over was a major boost for Thomson-CSF / Thales as it
bolstered France’s attempt to create a global player in defence electronics. 779 780 781 That being said,
773
Harrison, “‘UK first’ deal that could set Europe at war; News Analysis: France doesn’t like it, and Germany is
simply livid” (January 1999)
774
BAe Vice-Chairman Lapthorne quoted in Ibid.
775
For more details on the merger options (BAe, Thomson-CSF, LMC, NGC) considered by Marconi, see Fluendy
1999) and Jones (1998).
776
Gow (2000)
777
Little (2000) and Abrams (2000)
778
The Independent (2000)
779
France’s realist, national-interest-based A&D industrial approach is illustrated by the fact that Thomson-CSF,
rebranded “Thales” in 2000, has in recent years pursued a “multi-domestic” defence market strategy focusing first on
Europe and later on expanding into South Africa, Australia, South Korea, and Singapore. This strategy involves
acquiring full control of A&D subsidiaries abroad initially held through JVs.
780
One of the reasons that Paris picked Denis Ranque as Thomson-CSF CEO in 1997 was that he had previously
managed a Franco-British JV with Marconi. As “Le Monde” put it: “Qualité supplémentaire [de Denis Ranque]: il
dirige une société franco-britannique, ce qui constitue un signal positif en direction de l’Europe. Cette dimension
internationale paraît particulièrement importante alors que l’une des missions du nouveau patron de Thomson-CSF sera
de participer à la restructuration des industries de défense en Europe.” (Le Coeur & Rocco, 2000)
781
For France, the Racal deal had the added benefit of preventing the company from being acquired by an American
competitor. The take-over also served as a tangible example of the new post-St. Malo “rapprochement” in Anglo-
French relations.
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British A&D companies (BAE in particular) have benefited from London’s “special relationship”
with Washington and gained privileged access to the US defence market.
As for the German A&D industrial approach, Europe’s biggest economy was somehow caught
between France and the UK. On the one hand, DASA pursued a corporate strategy focused on
maximising profits and eliminating inefficiencies. While it recognised the importance of political
leadership to create the appropriate pro-merger regulatory framework, DASA firmly believed that
the process of European A&D industrial consolidation process should be driven by private sector
executives, not by government bureaucrats. 782 783 This shared Anglo-Saxon free-market mentality
was also the main reason why DASA and its parent DCX were so eager to pursue a merger with
fully privatised BAe. It was only after BAe had abandoned their bilateral merger talks in favour of
Marconi and after Paris signalled its willingness to reduce its stake in EADS to an absolute
minimum that the German executives’ deep-seated fears and distrust of French state interference in
the A&D sector were (at least partially) overcome. France’s policy of claiming design and project
leadership in joint Franco-German / European A&D programmes (treating DASA as a junior
partner ) also explains why DASA preferred to merge with BAe. 784
The German government “aggressively promoted pan-European mergers and the need to achieve
major economies of scale […] but it firmly rejected dogmas such as state ownership 785 that
prevailed in France, Italy and Spain.” 786 As the world’s export champion, Germany was a strong
proponent of free trade and displayed an instinctive scepticism about government interference in the
economy through direct shareholdings in “strategic” companies or the pursuit of a mercantilist trade
and industrial policy. At the same time, there can be no doubt that the historic symbolism of
Franco-German reconciliation served as a powerful backdrop for the EADS merger. Since the
signing of the 1963 “German-French Friendship Treaty”, the two countries had continuously
intensified their A&D industrial collaboration (Alpha Jet, Transall, etc.). While – during the second
half of the 1990s – political differences over the pace and desired end state of pan-European
782 A DASA board member expressed his company’s frustration at the lack of political backing by Europe’s
governments for large-scale pan-European industry consolidation: “We have had hardly any progress in the past three
years, just a lot of lip service. […] As industrialists, we could move as fast as the Americans. We could merge
industries, but we cannot merge markets and government policies.” Morrocco (October 1997)
783 An unnamed senior DASA executive responded to the Franco-British-German trilateral declaration of 9 December
1997 on “the urgent need to restructure Europe’s A&D electronics industries” as follows: “[DASA] welcomes [the
governments’] statement. Although we think the European industry’s restructuring is an assignment for the companies
involved, it is the politicians’ task to create the right framework.” Sparaco (December 1997)
784 “French government officials today regret the German aerospace industry’s inclination to favour stronger links with
the UK. ‘Maybe France went wrong in not forging more opportunities for German leadership in industrial programs,’ a
French [aerospace] executive acknowledged.” Sparaco (December 1998)
785 “Länder” governments like Bavaria and Hamburg initially owned important stakes in key A&D companies like
MBB but decided to privatise their holdings to help build German “national champion” DASA in 1989.
176

industry restructuring caused certain tensions between Paris and Berlin, the French government was
eager to leverage its “special relationship” with Germany to prevent a BAe-DASA link-up and to
foster, at a minimum, a bilateral Franco-German merger instead.
Unlike Paris, the German government did not own controlling stakes or Golden Shares in the
country’s A&D base and was therefore not in a position to directly shape the corporate strategy of
companies such as DASA. 787 788 Even if Berlin had pushed for a bilateral DASA-Aérospatiale link-
up from the beginning, it is fair to say that DCX CEO Schrempp would have pursued a BAe-DASA
merger anyways. The British government was in a similar position as it failed to engineer the
desired BAe-DASA merger and had to put up with the creation of BAE instead. Paris, however,
considered itself as the ultimate arbiter of the French A&D industry and saw it as a means to
enhance France’s “national security, economic gain, and national prestige”. 789 According to defence
minister Alain Richard, the A&D industry’s restructuring remains “the sole way to preserve
Europe’s independence and ensure it does not become the US industry’s subcontractor.” 790 Paris
would not approve alliances or mergers that fail to give French companies a prominent role: 791 “We
consider France’s position, due to its vast technological expertise, should be the top ranked in
Europe.” 792 This statement demonstrates France’s ambition to vigorously defend its A&D industrial
leadership role during the anticipated European consolidation end game and, ultimately, to
challenge the US mega-primes. 793
786 Sparaco (July 2000)
787 Paris negotiated a “Golden Share” arrangement and additional French national security-related safeguards with the
principal private shareholders of EADS, primarily Germany’s DCX: “[L]’accord d’actionnaires accorde de nombreux
privilèges à l’actionnaire français. Outre le droit de veto en matière d’acquisition, d’alliance stratégique, et
d’augmentation de capital, la France, puissance nucléaire, gardera un droit de contrôle sur les opérations concernant la
capacité de maîtrise d’oeuvre, de conception et d'intégration des missiles balistiques du groupe ainsi que sur quatre
filiales au coeur du dispositif nucléaire militaire français.” Jakubyszyn (1999)
788 Paris has a veto over EADS investments above EUR500 million and capital injections affecting the voting rights
distribution.
789 Aboulafia (2001)
790 Sparaco (December 1998)
791 Ibid.
792 Ibid.
793 “In recent years, France has shifted from its traditional Gaullist policy of ‘National Autonomy’ to a neo-Gaullist
policy of ‘Strategic Autonomy’ centred on building a stronger European defence capability. Under ‘Strategic
Autonomy’, France seeks to ensure its ability to choose where and when to operate militarily and its ability to operate
independently if necessary. But this policy does not mean that all industry sources must be French; only a few select
areas must remain national (e.g., nuclear weapons capability). Strategic Autonomy is supported by an industrial policy
of ‘Competitive Autonomy’ wherein France establishes formal agreements of mutual interdependence and supply
security with European partner states for certain defence capabilities, and will allow competitive bidding by other
European firms within this framework. Consistent with this Euro-strategic thrust, French officials assert that it is time
for the EU to strengthen its own technology and industrial base in order to stand on a more equal footing with the US.
To implement this goal, France will increasingly share its armaments acquisition resources, programmes, and industrial
base with European partners.” Bialos (2009) vol. II, pp. 307-308
177

Minister Richard’s statement is indicative of how Paris has tried to leverage Europe’s collective
technological and financial capabilities in pursuit of policy objectives that France could no longer
achieve acting purely on its own: Airbus, Ariane, and Galileo are prime examples. The Galileo case
is particularly instructive as it demonstrates how French political manoeuvring managed to transfer
Galileo’s control and budgeting authority from ESA – which operates on the principle of “just
return” – to the EU: an institution which has a much bigger and politically more opaque financing
mechanism, provides multi-billion euro subsidies to France’s highly protected agricultural sector
and counts Germany as the biggest financial contributor. 794 While France was generally hostile to
the idea of sharing design and technology leadership with its Western neighbour and deliberately
tried to keep German industry in a junior role, Paris was eager to get German financial backing for
joint bilateral / European A&D projects like Galileo. 795
After a multinational industry consortium (including EADS, Deutsche Telekom, etc.) pulled out of
Galileo in mid-2007, France lobbied hard to keep the project alive and ultimately managed to
convince its fellow EU members to cover the EUR2.4 billion shortfall by using EUR 1.6 billion
from unused EU farm subsidies and by taking the remainder from the EC’s technology budget. 796
While Germany failed in its attempt to implement Galileo (partly) within ESA, Berlin nonetheless
managed to extract concessions improving the participation of German industry in this project. 797
“What sounds like a petty bureaucratic matter in fact decides on who will be the paymaster and who
will be the beneficiary of Galileo.” 798 Germany served again as the paymaster for a French-designed
plan to develop an ambitious European A&D project designed to benefit France’s national security
and economic interests on the global stage. As a result of this successful French power-play to shift
Galileo on to the EC budget, the entire project has suffered from much less effective management
and cost-control. This chapter has also demonstrated that for the US and French governments,
security considerations (framed in realist terms) shaped aerospace decisions, whereas British and
German decision-makers were more confused and ambivalent. The French have arguably been the
most realist / mercantilist / sovereignty / security-oriented of these four states. The larger size of the
US economy and federal budget have allowed American policy-makers not to define their (A&D)
choices so explicitly.
794
French senior EU civil servant François Lamoureux – who served at the Transport Directorate-General during 1999-
2005 – played an important role in the EC’s taking control of Galileo.
795
BBC (2007)
796
Taverna (2007)
797
The EC “[divided the Galileo] purchases into a half dozen work packages, no more than two of which could be led
by the same company, and to mandate that at least 40 percent of each work package be allocated for subcontractors – an
arrangement designed to favour German suppliers”. See Ibid.
798
BBC (2007)
178

Chapter 5: Going American: Explaining the Boeing / McDonnell Douglas Merger
5.1 The A&D industry: caught between two worlds
This thesis seeks to demonstrate that realist arguments about international relations, even among
allies, were crucial in motivating governments to support the BMD and EADS mergers. It is
important to emphasise that realism is not only a prominent school of IR theory but also a set of
core policy assumptions and recommendations designed to help government leaders navigate the
treacherous waters of international relations. 799 Chapter 5 details how America’s attempt to preserve
and advance its international hegemonic position – or, to put it differently, to try to prevent the
country’s (relative) decline during the post-Cold War period – explains why the US consolidated its
aerospace industry at a purely national level with virtually no involvement from their Western
allies. In addition, Chapter 5 will also examine several transatlantic corporate mergers that did take
place after the end of the Cold War and which were not blocked by the US government. By
contrasting big transatlantic mergers in three industries – automotive, banking, and
telecommunications – with the striking absence of major transatlantic M&A activities (at the prime
contractor level) in the A&D industry, this chapter provides further insights into what separates the
EADS and BMD mergers from M&A transactions in “normal” industries.
The A&D industry is caught between two worlds. In the realist world, national security concerns
dictate that a country should strive to attain maximum autonomy and independence for its own
A&D sector. To [realist] national security analysts, “where [critical A&D] production takes place
and who controls the process are of crucial importance.” 800 In a globalised world economy, in
contrast, many goods and services are often traded (almost) freely across borders, FDI and capital
flow from one country into the other, and key goods, services, and technologies are sourced in the
“global marketplace”.
“[This aerospace industry] debate has revealed two camps: one that draws on the standard
liberal prescriptions of easy access and free choice as a means of bringing efficiency and
dynamism to the industry; and a second that draws on so-called neo-mercantilist
recommendations, entailing use of the state to strengthen national firms and keep control
over the industry.” 801
799 Realism addresses the key question of how political leaders can maximise the relative power position of their
respective state while, at a minimum, ensuring its survival as an independent entity in the context of an anarchic
international self-help system.
800 Moran (1990) p. 58
801 (Moran & Mowery, 1991) p. 135
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In essence, this thesis argues that, when it comes to the BMD and EADS mergers, realist arguments
won against liberal institutionalist arguments, both in Washington and in Paris. For reasons of
realism / national security, neither the US nor the French government were willing to simply
“retreat” after the end of the Cold War and to allow their respective A&D champions to pursue
laissez-faire corporate strategies based on the principles of liberalism, international cooperation,
unbridled globalisation, and open markets. While, during the 1990s, Washington responded to the
new post-Cold War realities by promoting greater economic efficiency and economies of scale
through massive national A&D industrial consolidation, the American hegemon continued to have
serious reservations about full-fledged transatlantic M&A deals – especially at the prime contractor
level – for fear of losing control over sensitive US technologies and of fostering foreign dependence
in the “strategic, high-technology, high value-added industr[y]” 802 par excellence, with enormous
implications for international military and economic competition. 803 From a mercantilist
perspective, large-scale transatlantic M&A deals risked the gradual erosion of America’s aerospace
industrial base and a further deterioration in the yawning US trade deficit as well as the national
balance of payments. As two neo-mercantilist analysts observed in 2007:
“[The A&D] industry has been the top US export sector for more than 50 years and many of
the advanced engineering procedures have been successfully adopted by other US
industries, e.g., automotive, electronics, and metal fabricating. For more than four decades,
aerospace products and parts have accounted for 7-10 percent of US merchandise
exports.” 804
For Washington, the health and success of the nation’s aerospace industry was thus of vital strategic
importance, especially since America was losing export share in many other sectors. 805 The growing
competitive threat posed by Europe’s Airbus consortium became a particular concern to US
policymakers, who feared that an increasing loss of export markets and the growth of import
penetration could seriously weaken the American A&D sector. From a mercantilist perspective,
802 OTA (1991) p. 9
803 In general, neo-mercantilists attach much more economic / strategic importance to the manufacturing sector than to
the service industry: “Manufacturing matters for three key reasons: 1. Manufacturing jobs generally provide better
wages than equivalent service jobs because worker productivity is generally leveraged by more capital and more
proprietary know-how. 2. Manufacturing provides an abundance of jobs for people of ordinary ability as opposed to the
PhD types who get many of the jobs at, say, Microsoft. It thus closely matches the job-creation needs of society. 3.
Manufacturing companies are big exporters.” In my book, ‘In Praise of Hard Industries’, I calculated that per unit of
output American manufacturing businesses export about eleven times as much as service businesses. Few
manufacturing businesses score better on these three criteria than the airliner industry. Even if it were not so closely
intertwined with America’s national defence, the industry would still be of pivotal geopolitical importance. The point is
that it has long been America’s biggest export earner.” Fingleton (2005) p. 9
804 (MacPherson & Pritchard, 2007) pp. 552-553
180

Washington embraced the ethnocentric industry consolidation approach underpinning the BMD
merger because the creation of US-based “national champions” was seen as the best way of keeping
the rising European / foreign competitors at bay while trying to make sure that the aerospace
industry’s unique positive strategic / economic externalities continued to benefit Washington and
the US economy. 806 If US policymakers had viewed the aerospace sector as just another “normal”
industry, one would have expected the same large-scale transatlantic M&A deals that became so
prominent in many other businesses during the 1990s.
Washington’s opposition to transatlantic M&A deals involving prime contractors is particularly
important as this was the last area where policymakers still felt that the A&D companies had a
distinct “nationality”. By the 1990s, however, even “national” prime contractors – due to the ever-
increasing complexities of state-of-the-art military and commercial aircraft – required millions of
sub-components manufactured by thousands of sub-contractors both at home and abroad:
“[B]ecause military and commercial aircraft involve the integration of so many complex
sub-systems, and because many of them are sourced internationally, the ‘nationality’ of the
final product has been increasingly difficult to establish, creating complex implications for
policy.” 807
“In 1960, [US] imports of aircraft and parts amounted only to 5 percent of [US] aircraft
exports by value. Today [2007], that figure is 44 percent. The foreign content of a Boeing
727 in the 1960s was only 2 percent. For the 777 in the 1990s, foreign content was nearly
30 percent. In the case of the 787 ‘Dreamliner’, […] foreign content might run as high as
70 percent.” 808
Given the unprecedented internationalisation of the aerospace industry’s supplier base, realist and /
or mercantilist-inspired demands that all of the relevant sub-components and sub-contractors for
“American” aircraft should come from the US would be virtually impossible to satisfy. 809 Since the
1970s, American A&D companies have entered into offset agreements with foreign suppliers to
help secure major military and commercial aircraft exports. To seal the F-16 “sale of the century” in
805
“It is difficult to exaggerate [Boeing’s]’s importance […]. [A]t a time when the US trade deficit reached a record
[US]$489 billion in 2003, [Boeing] is one of the country’s most reliable export machines, accounting for close to
[US]$20 billion in overseas sales.” Gantenbein (2004) p. 58
806
“Advanced capitalist states promote and regulate production globalisation using state-created international
organisations and trade agreements and intra-national policies and legislation that assist indigenous economic actors to
execute transactions with competitive advantage over foreign counterparts.” Gritsch (2005) p. 8
807
(Moran & Mowery, 1991) p. 144
808
(MacPherson & Pritchard, 2007) pp. 552-553
809
In 2006, Congressman Duncan Hunter tried to pass a law requiring that all specialty metals used in US military
hardware be smelted domestically (including all bolts, nuts, etc.). This initiative – opposed by the Bush administration
and the AIA (Aerospace Industries Association) – failed. Anselmo (2006)
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1975, GD offered its prospective European customer countries not only a 40-percent stake in the
sourcing / production of components for “their” F-16s, but also a 10-percent sourcing / production
share for those fighters delivered to the USAF. GD’s far-ranging and unprecedented concessions
involving strategically important American military matériel clearly required Washington’s
consent: 810
“For the US government and aerospace industry, offset agreements have always evoked a
mixed reaction. Their desire to penetrate foreign markets for both political and economic
reasons has struggled with a desire to limit foreign access to some of the technologies
contained in military and civilian high-technology products like aircraft. Before 1978, offset
agreements in military aircraft sales were largely negotiated on a government-to-
government basis, indicating the mix of political and economic motives underpinning them.
By the 1990s, they had become a mainstay in sales of both military and commercial aircraft
to foreign governments and foreign firms and in sales to both industrialised and
industrialising countries. As foreign producers have improved their technological
capabilities, the products and technologies subject to offset agreements have increasingly
involved highly advanced US technologies in both military and civil applications.” 811
The rise of A&D offset agreements reflects the sector’s technological sophistication and the
internationalisation of its supplier base. In the highly competitive commercial aircraft sector,
exploding R&DP costs have prompted Airbus and Boeing to increasingly rely on multi-national
networks of sub-contractors / suppliers located in key export markets abroad (Japan, China 812 ,
India, etc.). 813 The two rivals have embraced this outsourcing / offshoring strategy not only to
obtain the best technology at the best price, but also to help secure lucrative export contracts in the
countries concerned. “In the manufacture of the A300, for example, Airbus procured over 50
percent of the plane’s components from US manufacturers, thereby capturing both their technology
and their political support.” 814 In contrast, “the participation of Japanese firms in the manufacture of
the 767 815 has helped Boeing to maintain its domination of the Japanese commercial aircraft
market”; 816 817 a situation which endures until today. 818
810
Washington and GD also agreed to the F-16 offsets to discourage European governments from developing a rival
European fighter aircraft.
811
(Moran & Mowery, 1991) p. 142
812
In 2008, Airbus agreed on an offset deal with China involving an A319/A320 assembly line and a composite
materials and components JV. Stumbaum (2003) pp. 27-30
813
“[Boeing] has become the nation’s largest corporation in terms of offset-related commitments.” (MacPherson &
Pritchard, 2007) p. 554
814
(Moran & Mowery, 1991) p. 142
815
“The Boeing 767 was the first US aircraft programme that entailed substantial international cooperation in
developing commercial transport. It can be inferred that there were four major reasons for cooperation between Boeing
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More recently, EADS / Airbus teamed up with NGC to compete for the Pentagon’s KC-X tanker.
To stand any chance of beating out Boeing for the first US$40 billion tranche of this contract –
valued at US$100 billion over 40 years – the NGC-EADS consortium offered huge sub-contracting
opportunities to suppliers across the US. In its lobbying and PR campaign focusing on Congress
and the US media, the transatlantic consortium always emphasised the associated employment and
investment benefits for the US economy. The tanker deal would also provide Airbus with its first
assembly and manufacturing presence in America – an important move boosting the company’s
competitiveness by providing a natural hedge against Euro-Dollar exchange rate fluctuations.
There is another important driver of international cooperation and multi-national teaming
arrangements in the global aerospace industry, especially when it comes to launching ultra-
expensive next generation aircraft like the A380 or the Dreamliner:
“Prime contractors in civil airframes and engines have been driven not only by a desire to
penetrate foreign markets but also by an interest in expanding the array of suppliers that
compete for contracts and in sharing the development costs and risks. Higher development
costs create higher incentives for risk-sharing; broad corporate alliances reduce the need to
‘bet the company’ on each generation of new products.” 819
Boeing has in recent years adopted a “systems-integration mode of production” in which “key
components and sub-assemblies are designed and manufactured by external suppliers”. 820 821 As the
and companies in Japan at this time, including risk-sharing, enhanced capabilities through cooperation, participation in
development and market entry, and mutual profit-taking.” (MacPherson & Pritchard, 2007) p. 556
816
(Moran & Mowery, 1991) p. 143
817
In 1974, Boeing gave Mitsubishi a small early offset contract for the 747. Subsequently, Boeing was able to score
“major sales” of jumbo jets to Japan. (MacPherson & Pritchard, 2007) p. 554
818
Boeing was able to leverage Tokyo’s dependence on strong military and security ties with the US to establish a
dominant position on the Japanese commercial aircraft market, the world’s second largest. Bilateral A&D industrial
cooperation was also given a boost by the joint development of the FSX fighter. However, neo-mercantilists concerned
about Boeing’s outsourcing of advanced aerospace components to Japan argue that the US giant “has often wasted the
considerable geopolitical leverage it enjoys”. […] “Boeing has rarely needed to give away jobs to secure orders from
Japan. Quite the contrary, Japan has been more or less a captive market. […] US-Japan trade imbalances have long been
so large that Tokyo has felt obligated to find ways to boost its purchases of American goods. In the absence of
compelling technical reasons to buy European, therefore, Japan’s highly regulated airlines surely had little choice but to
buy American. After all, by dint of scale economies, Boeing enjoyed a commercial edge over Airbus well into the
1990s. Certainly, while the transfer of jobs to secure orders has been merely lamentable, the transfer of advanced
technology has been utterly inexcusable. Given that Boeing was safe from under-cutting by Airbus, it could easily have
resisted the more outrageous technology requests, particularly those from Japan.” Fingleton (2005) pp. 10-11
819
(Moran & Mowery, 1991) p. 144
820
(MacPherson & Pritchard, 2007) p. 553
821
“To those who can’t see through business jargon, a ‘systems integrator’ may sound more impressive than a mere
manufacturer. In reality, it is a cop-out, as a glance at some of the industry’s other systems integrators makes clear.
Embraer of Brazil is a systems integrator. So is Aviation Industries of China. Like the new Boeing, these companies
lack the advanced know-how and machinery to make key components in a modern first-world plane. Instead they must
183

787 Dreamliner illustrates, Japan’s aerospace companies have been the prime beneficiaries of a
rapidly expanding US outsourcing strategy, which allows them to build the entire wing of
822 823
America’s principal next-generation commercial aircraft:
“The Japanese heavy firms Mitsubishi, Fuji, and Kawasaki are slated to build 35 percent of
the 787 aircraft structure, which will include the design and manufacturing specifications in
comparison to a build-to-print relationship on previous Boeing programmes.” 824 825 […]
“[The] three Japanese companies are slated to create the manufacturing processes for final
assembly of the wing. Boeing has never considered subcontracting wing production to
external suppliers before.” 826
“For the first time in US commercial aviation history, a new aircraft launch has been
structured so that foreign partners have full control over sub-assembly design,
manufacturing, sub-tier supplier selection and, ultimately, the financial muscle to challenge
827 828 829
what little remains of the US commercial aircraft industry.”
Neo-mercantilists are greatly concerned about Boeing’s “orgy of indiscriminate outsourcing” 830 and
the decision to hand the 787’s wing production 831 to Japan, a move that entails the transfer of
import such components from more advanced manufacturers in Japan and Europe.” […] “The key to the new Boeing is
a Faustian bargain with Japan. In a rerun of earlier American industrial implosions, Boeing has come to rely more and
more on Japanese contractors for its most advanced engineering and manufacturing.” Fingleton (2005) pp. 10; 7
822 In 2004, Boeing and the Japanese Aircraft Development Corporation – Japan’s state-sponsored aerospace
consortium involving Mitsubishi Heavy Industries (40 percent), Kawasaki Heavy Industries (30 percent), Fuji Heavy
Industries (20 percent), Nippi (5 percent), and ShinMaywa Industries (5 percent) and is in charge of coordinating the
country’s participation in international collaborative aerospace projects supported by the Ministry of International Trade
and Industry – agreed to jointly develop the 787 “Dreamliner”. See (MacPherson & Pritchard, 2007) p. 555
823 See Annex I, “Outsourcing trends for Boeing airframes”, Ibid., p. 556
824 Ibid., p. 556
825 The Japanese government, through its “International Aircraft Development Fund, has provided a US$3 billion lowinterest
loan to heavy firms Mitsubishi, Kawasaki, and Fuji to allow their participation in the 787 project. Ibid., p. 555
826 Ibid., p. 554
827 Ibid., p. 557
828 The selection of second-tier and third-tier suppliers for the “Dreamliner” is important as it determines which
companies will benefit from the anticipated economic “multiplier effects”. “The economic impact for the Japanese
aircraft industry will include major multiplier effects, with the three Japanese ‘heavies’ in control of second- and thirdtier
supplier selection. The spread of subcontracts for the Japanese airframe manufacturers might add as many as 75
Japanese sub-tier suppliers. This does not include the estimated 60 second-tier Japanese engine, equipment, and
material suppliers, which could add a further 100 third-tier Japanese suppliers. Prior to the 777, almost all of these
multiplier effects rippled through the US economy.” Ibid., p. 560. See also interview with Bill Lewandowski “on the
future of the US aerospace supplier base” referenced in Ibid., p. 557
829 “Powered by a complex mix of political expediency, logistical need, and commercial self-interest, important strands
of US aerospace technology have been transferred to Japan since the early 1950s. […] Historically speaking, then, there
is nothing intrinsically new about Boeing’s evolving technological relationship with its Japanese risk-sharing partners.”
Ibid., p. 555
830 Fingleton (2005) p. 7
831 “Wing-making is one of the most advanced sub-sectors of one of the world’s most advanced manufacturing
industries. […] It is […] hardly overstating things to say that the wings are to a plane what the sound box is to a violin –
its defining feature. Just as a violin is not a Stradivarius without a sound box made in Cremona by Antonio Stradivari, a
plane can hardly be considered a Boeing without wings made in the [US] by the Boeing company. […] Perhaps the best
indicator of the challenges involved in making wings for large passenger jets is that, apart from the [US], only one
184

sensitive US technologies 832 and eventually gives Tokyo “total production competence” 833 in
commercial airframes. Mercantilists / realists are not only worried that Boeing “has become so
hollowed out that the impact is clearly visible in America’s rapidly worsening trade deficits”, 834 but
also that the proliferation of cutting-edge US technology will help Japan to “soon create its own
standalone [commercial] aircraft program while simultaneously developing a low-cost Asian
supplier network”. 835 836 Charles Wessner, Director of Technology and Innovation at the National
Academy Sciences, has warned that the outsourcing of the 787 wing technology and larger
composite structures to Japan could ultimately curtail US innovation capability and compromise US
security interests. 837
Even mercantilists acknowledge that Boeing’s “launch of the 787 programme based on systems-
integration makes good sense in terms of risk reduction, the containment of development costs, the
acquisition of advanced composites, and the maximization of shareholder value”. 838 This statement
is a clear indication of how the industry’s changing economic and technological dynamics are
undermining mercantilist / realist arguments (in the US and elsewhere) by strongly pushing
aerospace companies towards cross-border collaboration / cooperation / integration in an effort to
remain competitive and cope with growing business risks. This new pattern of cross-border
aerospace collaboration highlighted by the Boeing 787 reflects the enormous difficulties of relying
on private finance to develop major next-generation aircraft projects. Boeing hesitated to “bet the
company” on new airplane developments – so risk-sharing (indirectly with the Japanese
government) was a form of insurance.
Yet while a systems-integrator approach may well be attractive for an individual company
like Boeing for a certain period of time, mercantilists / realists are by definition focused on
“broader economic and strategic concerns, including the rapid erosion of the US supplier
base, the possibility that Japan might eventually become a global competitor […], and the
nation, Britain, boasts a serious record in the field. [BAE’s] wing-making capability is one of Britain’s few remaining
world-class manufacturing businesses. Its technology, in turn, has been a key driver of the success of Airbus […].”
Ibid., p. 560
832
“Japanese risk-sharing partners must receive infusions of tacit scientific knowledge from Boeing – otherwise the
strategy would not be effective. This technology transfer raises an important question for trade policy analysts who are
concerned with national industrial competitiveness. Specifically, does technology transfer to Japanese companies
portend a long-run threat to the commercial prospects of US aerospace firms?” (MacPherson & Pritchard, 2007) p. 553
833
Ibid., p. 554
834
Fingleton (2005) p. 7
835
(MacPherson & Pritchard, 2007) pp. 553-554
836
“The current Boeing/Airbus duopoly may soon give way to a triopoly (add Japan to the mix), largely as a result of
Boeing’s industrial offset and technology transfer relationships with Japan’s aerospace companies.” Ibid., p. 564. China
and India are the two other key countries with the ambition to become major global A&D industry players.
837
Interview with Charles Wessner “on the leakage of US commercial aircraft technology to overseas sources”
referenced in Ibid., p. 559.
838 Ibid., p. 564
185

fact that rising levels of foreign content ultimately contravene the interests of US workers in
839 840
skilled occupations”.
Some mercantilists even believe that these outsourcing / offshoring trends – coupled with the
continuing rise of Airbus – could force Boeing to completely abandon the manufacturing side of the
aerospace business within the next decade. Instead, the US “national champion” would focus on
final aircraft assembly, sales and marketing, and aviation-related services. 841 Given the significant
overlap and synergies between the civilian and military aircraft sector, Boeing’s abandoning of
crucial aircraft manufacturing competencies “would [inevitably] undermine its defence business,
with distinctly ominous implications for America’s long-term security”. 842 Finally, while decrying
Europe’s government subsidies for Airbus, US mercantilists argue that Boeing should emulate the
European aerospace company by relying more on “indirect offsets” and keeping foreign
843 844
subcontractors at arms length.
839 Ibid., p. 564
840 Mercantilists believe globalisation’s financial and competitive pressures make (aerospace) companies pursue
corporate strategies like outsourcing and offshoring that – while delivering certain short-term financial / operational
benefits – ultimately put longer-term national economic / strategic / industrial base interests at serious risk.
841 “Looking to the future, Boeing will likely exit the manufacturing side of the commercial aircraft industry by the time
a post-787 program is conceived (probably less than 10 years). If the 787 series is financially successful, there is a
strong possibility that a 797 might be developed under total systems integration (i.e., design, develop, and build abroad
– but assemble at home).” (MacPherson & Pritchard, 2007) pp. 564-565
842 Fingleton (2007) p. 7
843 “Although Airbus also employs offset agreements to secure international orders, Airbus differs from Boeing in that
the former more typically operates with “indirect offsets” (e.g., granting landing rights to major EU airports such as
Heathrow or Gatwick). In addition, Airbus tends to subcontract internationally on an arms-length basis (build-to-print)
– rarely allocating full design responsibilities to foreign subcontractors […].” (MacPherson & Pritchard, 2007) pp. 554
844 “[…] Airbus has generally sourced components for each new model initially from within Europe. Only at a later
stage in the cycle does it contemplate sourcing from non-European suppliers. By that time, Airbus’s European suppliers
will have moved on to more advanced work on newer Airbus models. To be sure, in resisting offset requests, Airbus has
enjoyed powerful support from European governments. Rather than countenance the transfer abroad of advanced
manufacturing jobs, Airbus’s government backers have often dangled landing rights at key European airports. They
have also used geopolitics to their advantage, particularly in the Middle East, where they capitalize on anti-American
feeling.” Fingleton (2005) p. 10
186

5.2 Growing foreign dependence of the US aerospace and defence industrial base
In the case of the US, foreign sourcing is “the use of supply, manufacture, or technology that are
located outside the United States or Canada” 845 . There are several reasons why realist / neo-
mercantilist proponents – from a national security perspective – consider suppliers located outside
North America 846 as less reliable: these factors include geographical distance from the US,
proximity to potential combat theatres abroad, and / or political or economic instability in the
foreign supplier’s respective home country. 847 848 In contrast, when business leaders decide where to
source goods, services, and technology, they are also taking into account factors other than
geographical location, such as cost, quality, performance, and delivery time. 849 As a result, a
domestic A&D manufacturer may well determine that foreign suppliers offer the best “deal”
compared to domestic competitors. The national origin / geographical location of a supplier is
therefore not necessarily of decisive importance, and may only become relevant with regard to its
impact on the anticipated transaction costs, that is, both in terms of transportation costs as well as
the level of “trust” involved. Business leaders and liberal economists are focused on the financial /
efficiency gains that can be derived from leveraging existing “international comparative
advantages”. Realists / “defence industrial strategist” 850 are concerned about “foreign dependence”
and its impact on a country’s “capacity to build or to replace critical force structures independently
of economic and political decisions of other sovereign powers” 851 . 852 Globalisation is perceived as a
potential threat which raises the spectre of “foreign influence, foreign control, and foreign
domination” 853 of America’s A&D industrial base. While the US had already been dependent on
foreign imports of key raw materials for both civilian and military applications (oil, titanium, etc.)
845 GAO (1991) p. 3
846 Washington considers Canadian A&D companies as part of the US national defence industrial base. This assumption
indicates two things. First, the US government views Canada as a rock-solid ally that will never become an adversary;
second, even if Canada were to turn hostile vis-à-vis the US, to the extent that the lack of access to Canadian suppliers
constitutes a US national security threat, the US could easily invade Canada as virtually all of the country’s industrial
assets and about 50 percent of the population are located within a 100-kilometre stretch north of the US-Canadian
border.
847 GAO (1991) p. 14
848 Technology transfers from the outsourcing country to third countries also risk having a negative impact on
America’s national security and defence industrial base. Cable (1995) p. 318
849 GAO (1991) p. 4
850 “Defence industrial strategists are trained in both economics and defence analysis […] to define exactly what is the
nature of the peacetime threat from globalisation, and to confront exactly what does, and what does not, help to meet
that threat.” Moran (1990) pp. 58-59
851 Ibid., p. 58
852 Advocates of free trade / cooperation / globalisation / open markets are much more risk-prone than proponents of
realism who believe in the paramount importance of national security: “In a liberal international economic system,
vulnerability to external economic events and dependence on foreigners are a necessary consequence of immersion in
global markets. They are the source of opportunities for improved living standards, not threats to be avoided. […]
Indeed, one of the defining characteristics of liberal capitalism is uncertainty and risk. That is the basis for economic
freedom and choice. One necessary corollary is a sense of insecurity for individuals, firms, and nations. Yet the idea
that economic policy should have a security dimension will not go away. It repeatedly surfaces whenever defence
procurement involves dependence on foreign suppliers […].” Cable (1995) pp. 305-306
187

for quite some time, the new foreign dependence that began to emerge in the 1970s / 1980s was
qualitatively very different since it also extended to manufactured (high-tech) goods where
Washington had enjoyed a high degree of autonomy since WWII. 854
Realists fear that foreign source procurement could result in 1) dependencies on foreign suppliers
that are less reliable (supply interruptions due to foreign sanctions, transportation problems, etc.)
than domestic companies; 855 2) reduced domestic production capacities of certain goods as
manufacturers at home do not have enough demand to keep production lines “hot”; and 3)
questionable (future) access to state-of-the-art technologies as domestic R&D capabilities are
increasingly ramped down along with production sites. 856 It is important to note, however, that not
all forms of foreign defence sourcing result in foreign dependence, and that not all forms of foreign
dependence create a national security threat or vulnerability. US dependence on “multiple, open
foreign sources that possess multinational perspectives” 857 is far less worrisome than American
dependence on a “single, closed, and centralised foreign source that maintains a national
perspective” 858 : The crucial variable to determine if a certain level of foreign dependence creates a
threat / vulnerability or not is “whether the lack of available alternatives jeopardises national
security by significantly reducing the capability of a critical weapon system” 859 . 860 “[D]ependence
becomes vulnerability and affects a relationship when the opportunity costs of foregoing the
relationship are high or intolerable” 861 .
862 863
The national security implications of foreign sourcing can be analysed from two perspectives:
first, the impact on the surge and mobilisation capacity of America’s defence industrial base;
second, the impact on the country’s technology base. “Surge” and “mobilisation” refer to
“production of [increased] quantities under time constraints” 864 . While “surge” 865 capacities usually
853
Moran (1990) p. 58
854
Pages (1996) p. 11
855
“In practice, the ‘security of supply’ issue involves two separate problems, though they are often confused (and often
exist together). The first is that interruptions in import supply – caused by war, revolution, foreign sanctions or accident
– could severely disrupt the national economy, or parts of it. The second is that overseas suppliers could acquire a
monopoly position through unique ownership or cartel action, turning the terms of trade against the importer. This latter
concern is exemplified by the price of oil but is also relevant to new technologies (a major element in strategic trade
theory is the advantage in terms of monopoly ‘rent’ which accrues to a technological leader). These two preoccupations
may coincide but are analytically different and have different policy implications.” Cable (1995) p. 313
856
GAO (1991) p. 4
857
Ibid., p. 14
858
Ibid., p. 14
859
Ibid., p. 3
860
[W]here alternative suppliers are few, and the difficulties of developing substitutes great, the potential for delay,
denial, manipulation, or blackmail on the part of outsiders is ever-present.” Moran (1993) p. 214
861
Pages (1996) p. 8
862 NDU (1987)
863 Ibid., pp. 12-15
864 GAO (1991) p. 12
188

need to be achieved during a relatively short time frame (that is, up to a few weeks or months),
“mobilisation” is a much more comprehensive process that can take up to several years. The key
question is how quickly defence material imported from foreign suppliers can be replaced or
augmented by deliveries from domestic companies. 866 However, one can also argue that the concept
of “surge capacity” is no longer relevant in today’s security and defence industrial environment.
After all, it is virtually impossible to double the production of modern military aircraft in, let’s say,
six months. Furthermore, Western governments do not really hope or expect to conduct high-
intensity military operations for more than 2-3 months any longer. 867
Potential threats and vulnerabilities to the (US) technology base are more diffuse and long-term in
nature and can in turn be assessed from two perspectives. The first national security concern is to
ensure US access to state-of-the art technologies for the continued research, development,
production, and maintenance of crucial A&D systems during times of peace and war. The second
concern is to ensure that America remains the world’s technology leader and to control or prevent
the transfer / diffusion of sensitive technological innovations and secrets to other countries. The
availability or denial of technology access is often a function of the level of market concentration in
a given industry. The higher the market share of foreign companies that provide America with
access to crucial goods, services, or technologies, the higher the risk that “a tight network of foreign
industries and supporting institutions that dominates key technologies could exercise global power
by setting the terms on which technology [as well as related goods and services] are traded” 868 .
American export controls are designed to manage or prevent the spread of sensitive US
technologies to other countries.
865 “Surge is the accelerated production, maintenance, and repair of selected items and the expansion of logistics support
services to meet contingencies short of a declared national emergency utilising existing facilities and equipment”.
Mobilisation is the act of preparing for war or other emergencies through assembling and organising national resources,
and the process by which the Armed Forces, or part of them, are brought to a state of readiness for war or other national
emergency.” US Joint Chiefs of Staff quoted in Ibid., p. 12
866 If substitution problems do occur, they are generally the result of a lack of alternative, qualified suppliers, a lack of
suitable substitutes, insufficient production capacities from domestic suppliers, or the need for rather long production
lead times which make it impossible to quickly replace foreign-sourced supplies.
867 “Barring the now unlikely resurgence of major conventional war between great powers, the need for the defence
industry to be able to surge production to accommodate large-scale mobilization will probably remain remote. […]
Moreover, given the far greater complexity of modern weaponry, surge would be considerably slower today than it was
during [WWII].” Watts (2008) p. 75. However, that being said, US industry analysts have also defined the issue of
“surge capacity” more broadly (including the development of new systems, etc.) and continue to describe it as a “salient
concern” to this very day. “In the case of surge capacity, changes in the defence industry since the early 1990s have
accentuated earlier concerns that the industry lacks the capacity to develop new systems very quickly, or to surge
production in response to high levels of combat attrition or sudden shifts in the international security environment.
Studies indicate that this surge problem has existed for decades. Maintaining excess production capacity is expensive,
and the government has generally been unwilling to bear the cost of doing so (with the notable exception of
shipbuilding). […] Absent government support, both modern management practices and shareholder demands for
profitability dictate that firms should eliminate excess capacity and avoid stockpiling.” Watts (2008) pp. 54-55
189

“Buy American” restrictions “focus on protecting segments of the DoD contract market from
foreign-source competition to address trade and structural problems of certain industries” 869 . These
restrictions may block access of foreign suppliers to certain DoD programmes or, alternatively, may
only allow access based on certain requirements. “Each Buy American restriction is different in
terms of its impact and effectiveness and the particular industrial sector, class, or commodity it
affects.” 870 There are several reasons why Buy American restrictions have not proven to be very
effective when it comes to reducing the foreign dependence of the US defence industrial base. First,
the “Buy American Act” applies only to final products and does not generally cover components or
subcontracted items. 871 This exemption is important as the number and complexity of aerospace
components and subcontracted items have increased exponentially with each generation of new
aircraft over the past 30-50 years. The assembly of modern commercial and military aircraft
generally requires millions of sub-components supplied by thousands of sub-contractors. Realist /
mercantilist demands that all of these sub-contractors should be American would therefore be very
demanding, cumbersome, and extremely expensive. Furthermore, the question which sub-
assemblies represent “critical” technologies is not always easy to answer. Second, existing
restrictions are frequently waived to pursue other US policy goals (NATO rationalisation,
standardisation, and interoperability, etc.). 872 873 Third, the (partial) sourcing of US A&D products
from abroad increasingly occurs through offset agreements already discussed above. Fourth, “in
many instances, even when the total demand for a given item is reserved for domestic sources, the
demand is insufficient to stabilise a failing domestic industry or to preserve a healthy one”. 874 Fifth,
there are also instances – like the M1 Abrams tank – where DoD procurement officials give
preference to foreign suppliers due to availability, quality, and cost factors. 875 Finally, the R&DP of
advanced weapons systems is increasingly dependent on technological innovations taking place in
the civilian / commercial sector, which, over the past two decades, has pushed ahead to become the
true technology leader vis-à-vis the military / defence sector.
The US Congressional Office of Technology Assessments (OTA) already recognised this trend
early on and published a report titled “Arming Our Allies: Cooperation and Competition in Defence
868 Ibid., p. 14
869 GAO (1991) p. 6
870 Ibid., p. 6
871 Ibid., p. 3
872 “’Rationalisation’ is a term used to encompass all actions taken to use equipment and perform common tasks more
efficiently and cost-effectively”. ‘Standardization’ involves the adoption of common equipment, doctrine, and
procedures by all members of the alliance. ‘Inter-operability’ refers to compatibility of equipment and interchangeability
of parts, fuel, and ammunition.” Taylor (1982) p. 95
873 Most NATO members enjoy exemptions from the “Buy America” restrictions, which were first waived back in the
1970s through a number of bilateral MoUs to promote a two-way street in transatlantic defence procurement.
874 GAO (1991) p. 6
190

Technology” in 1990 to analyse “the changes in the environment of defence technology and
reduced East-West tensions will exert on defence industrial cooperation and associated alliance
relations”:
In view of the rising “spin-on” effects from commercial to military applications, OTA came
to the conclusion that […] “defence developments and production will depend increasingly
on the health of the domestic civilian sector and the ability of DoD and its contractors to
develop and gain access to the products and technologies needed for both our defence and
the civilian sector.” 876
Concerns about the increased foreign dependence of the US defence industrial base were first raised
in the early 1980s. Previously, in contrast to its European and Asian allies, America had relied
almost exclusively on domestic military technologies and production assets to meet the Cold War’s
defence needs. “This period of military self-sufficiency ended in the 1980s, as rising dependence
triggered a major outcry both within and outside the US government” 877 :
“There has been a serious decline in the nation’s defence industrial capability that places
our national security in jeopardy. An alarming erosion of crucial industrial elements,
coupled with mushrooming dependence on foreign sources for critical materials is
endangering our defence posture at its very foundation.” 878
In 1984, the Pentagon concluded that it was necessary to launch “an investigation into the nature
and scope of foreign dependency”. A report titled “A Study of the Effect of Foreign Dependency” –
was issued in 1986 and made “recommendations on how DoD could reduce the damage to the US
defence industrial base due to existing foreign dependencies and help identify and prevent future
foreign dependencies”. 879 The report recommended that 1) the Pentagon develop an information
system to track foreign dependencies throughout the entire defence procurement process, including
lower-tier suppliers; and 2) that weapons programme and procurement officers constantly evaluate
the potential impact of foreign dependencies on critical US weapons systems. 880 Ultimately,
however, “this report received limited attention […] its contents and recommendations, therefore,
were not fully considered or addressed” 881 . The Pentagon’s 1988 report “Bolstering Defence
Industrial Competitiveness” also warned against the consequences of foreign dependence:
875 Ibid., pp. 1-2
876 Ibid., pp. 13-14. See OTA (1989) and OTA (1990)
877 Pages (1996) p. 2
878 House (1980)
879 GAO (1991) p. 3
880 Ibid., p. 5
881 Ibid., p. 5
191

“From the national security perspective, foreign dependencies in technologies essential to
defence production are inherently risky, and minimizing them should be a [DoD] and
national priority. […] In a national emergency, the consequences of extensive dependence
on foreign sources could be extreme.” 882
Potential national security implications of foreign dependence in the US A&D sector have proven
difficult to assess. DoD efforts to identify and minimise current and future foreign dependencies
have been hampered by insufficient data, especially at the subcontractor levels. During the 1980s
and 1990s the Pentagon was criticised by the GAO for its inability to keep track of comprehensive
data on existing foreign dependencies – information deemed indispensable “to take appropriate
action regarding the domestic industrial base, including the economic, trade, and technology
security implications of procuring major weapons systems from foreign sources” 883 . 884
“Technology denial” to the US due to foreign dependence and technology proliferation / technology
exodus (to hostile third countries) are seen as the greatest risks to American national security in
connection with transatlantic / transnational defence mergers. Even during the Cold War, when
America and Western Europe were confronting the Warsaw Pact, foreign economic dependence and
technology denial tactics were leveraged by the US to exert pressure on France, Germany, and the
UK. In the 1956 Suez crisis, Washington threatened to order American oil companies to cut off
deliveries unless French and UK forces withdraw from the Canal. During 1964-1966, Washington
refused to sell US “supercomputers” to France, a move that delayed the French hydrogen bomb
programme and contributed to Paris leaving NATO’s IMS in June 1966. 885
During the 1982 Soviet pipeline dispute, Washington tried to force German, French, British, and
Italian licensees of relevant US technologies and European subsidiaries of US companies to refrain
from selling oil and gas equipment to Mosow. 886 President Reagan’s unilateral, extraterritorial,
retroactive sanctions to protest martial law in Poland were designed to block the delivery of
European compressors for the Urengoy pipeline from Siberia to Ukraine. European governments
rejected Reagan’s actions and decided to fulfil their pre-existing contractual obligations vis-à-vis
the USSR, mainly because they were eager to diversify their energy supplies after the 1973 and
1979 oil shocks. The UK, Germany, and Italy – “who saw US sanctions as a challenge not only to
882 DoD (1988) p. 47
883 GAO (1991) p. 24
884 GAO (1989)
885 The Economist (1966)
886 (Hufbauer & Schott, 1985) chapter 11
192

their sovereignty but also to vital national interests, such as domestic employment, energy security,
and détente” 887 – instructed their “own” companies operating under US licenses to deliver the
turbines to Moscow while France ordered the French subsidiaries of a US company to do the same.
The companies “were quite literally caught in the middle, facing severe sanctions no matter whose
directive they followed” 888 889 890 891
. In the end, Reagan backed down and lifted the sanctions.
Technology proliferation concerns again rose to prominence with the 1991 Iraq War, as Baghdad
was equipped with European weapons imported during the 1980-1988 Gulf War. These examples
of technology denial / economic coercion and technology proliferation / technology exodus to
hostile third countries did involve NATO members during the Cold War, at a time when close
relations between the Western allies were of paramount importance to confront the Soviet threat.
The Soviet pipeline dispute taught “European authorities […] the hard way […] that a
strong bargaining position and ultimate protection [against extra-territorial interference]
came not from some legal capability to exercise sovereign jurisdiction over activity within
their own borders [home soil requirements], but rather from arranging alternative suppliers
[…], diversifying purchasers, becoming [in the words of a German company] ‘very cautious
about any new contracts that would bind us so totally to a single source of technology and
equipment’” 892 .
The end of the Cold War rendered relations between Europe and America even more complex.
Without a common enemy, the relationship between Europe and America within NATO has
increasingly been shaped by diverging political and military interests, and growing economic
competition. The Suez crisis, the US supercomputer embargo, and the Soviet pipeline dispute have
highlighted the political, economic, and military vulnerabilities of Europe resulting from “foreign
dependence” in strategic industries, even among allies.
The threat of globalisation to America’s A&D industry began to emerge in the 1980s. The
conventional neo-mercantilist response advocated by national security strategists to deal with the
A&D industry’s globalisation has framed the threat in terms of the nationality of the firm and the
location of critical R&DP sites. Technologically advanced, autarkic “national champions” and the
887 Rodman (1995) p. 136
888 Moran (1990) p. 65
889 Reagan’s decision to back down and Washington’s inability to get even all US companies to support the
extraterritorial sanctions imposed on their foreign subsidiaries is a direct consequence of America’s declining
“structural hegemony” and “ideological hegemony”. Rodman (1995) p. 110
890 “The ensuing crisis in the [A]lliance dissuaded the Reagan administration from applying extraterritorial controls to
subsequent sanctions, although it continued to claim broad extraterritorial discretion in principle.” Ibid., p. 111
891 “[S]anctions are futile in an environment where US business is global and other states do not share US preferences.”
Ibid., p. 106
193

equirement that foreign suppliers establish R&DP facilities on US soil are viewed as the best
hedge against foreign manipulation and coercion. Strategic Trade Policy (STP) also calls for the
creation of “national champions” through import restrictions and export subsidies:
The ultimate goal is to “propel a country’s own entrants into a leading position, bolstering
their prospects for world predominance while denying the opportunity to rivals. This might
eliminate or drastically cut back the problem of foreign control, replacing dependency with
supremacy” 893 .
FDI in America’s A&D industry is often referred to as “penetration”, while acquisitions of US
companies by foreigners – regardless of the required “special security arrangements” 894 – viewed as
a “loss” to the US defence industrial base. The 1988 Exon-Florio amendment has given the
American president the authority to block foreign take-overs if they endanger “national security,
essential commerce and economic welfare”. 895 The provision also revitalised CFIUS, the
government’s screening mechanism to approve or block potentially sensitive foreign investments in
US companies. During the twelve years preceding Exon-Florio, CFIUS reviewed less than 30 cases;
in the first year after the amendment’s passage, CFIUS reviewed more than 50 cases. 896 President
Reagan publicly opposed the Exon-Florio amendment, but did not veto the 1988 trade bill to which
it was attached. Just three years earlier, Reagan had declared that “A world with strong foreign
investment flows is the opposite of a zero-sum game. […] We believe there are only winners, no
losers, and all participants gain from it.” 897 This episode betrays a deep underlying confusion within
US elites about the costs and benefits of open markets / globalisation vs. protectionism / neo-
mercantilism. 898 Traditionally, Washington has championed laissez-faire policy to promote an open
post-WWII international trade and investment regime:
“[FDI] has been considered a major instrument through which the [US] could maintain its
relative position in world markets, and the overseas expansion of [MNCs] has been
regarded as a means to maintain America’s dominant world economic position in other
expanding economies.” 899
892 Moran (1990) pp. 65-66 and (Hufbauer & Schott, 1985) p. 238
893 Moran (1990) p. 92
894 SSA include the creation of a separate US trust for the foreign parent company, where the top management and the
board of directors of the American subsidiary must all be US citizens, as well as restrictions on the access of foreigners
to classified information held by the US subsidiary.
895 Quote from Exon-Florio amendment in Omestad (1989) p. 130
896 Moran (1990) p. 95; Tolchin (1989)
897 Omestad (1989) p. 121
898 Earlier assumptions were that the US would remain the dominant economic player and technology leader, so such
contradictions would not arise.
899 Quote from Gilpin, “The Political Economy of International Relations”, in Omestad (1989) p. 122
194

However, with the deterioration of America’s macro-economic situation starting in the 1970s –
marked by high inflation, a weak dollar, rising unemployment, growing trade deficits, etc. –
Washington changed course and embraced neo-mercantilist policies to protect certain industries
such as semiconductors or automotive from foreign competitors through a combination of import
restrictions, public subsidies, etc. As the US consumed more than it produced – making up the
difference by borrowing money from abroad – American mercantilists decried the “continuing
erosion of [US] control over decision-making and technologies that are crucial to the creation of
national wealth and power” 900 . 901 While President George H.W. Bush pursued very internationalist,
pro-market policies, US public opinion data were already pointing towards the strong appeal of
protectionist / neo-mercantilist policies. 902
“The gulf between current policy and public attitudes means that the Bush administration
will come under intensifying pressure to consider controls on foreign ownership,
particularly as foreign takeovers continue or even accelerate in the 1990s.” 903
From a national security perspective, the “Gaullist nightmare of total foreign dependency” 904 in
A&D matters is clearly not desirable as it would make the country vulnerable to foreign
manipulation and coercion. However, there are also major potential pitfalls associated with the
government-supported creation of autarkic “national champions” called for by protectionist-minded
STP advocates; namely economic inefficiencies, a lack of competition and technological
innovation, as well as reduced economies of scale. The first problem is that the government-
supported creation of “national champions” makes it necessary to pick winners and losers,
champions and non-champions. Having political leaders and governments decide which companies
or technologies are worthy of a country’s targeted financial and political support raises the spectre
of costly misallocations of public funds that could result in “national champions” that are, in
essence, nothing else than “monopolists whose principal impact will be to collect rents from the
country’s own citizens” 905 . 906 The second problem is that protectionist measures to prevent foreign
900
Ibid., p. 119
901
“The debate on foreign investment may not bring out the best in the American people. Politicising foreign
investment appeals to the insular, nativist streak in US politics. Foreign purchases offer highly visible signs of
America’s declining position in the world economy and of the increasing penetration of its economic and political
system by foreign interests.” Ibid., pp. 119-120
902
“A 1988 opinion survey […] revealed that 74 per cent of Americans believe foreign investment has lessened US
economic independence, 78 per cent favour a law restricting foreign ownership of businesses and real estate, and 89 per
cent want foreign investors to register with the government.” Ibid., p. 119
903
Ibid., p. 119
904
Moran (1990) pp. 70-71
905
Ibid., p. 92
906
“[T]hose in the [US] who resist the idea of formulating an industrial policy for the industry will point to what they
regard as a costly and dismal record of the governments that have attempted it. They will emphasise that government
195

A&D companies from competing in the domestic market often backfire. “For any given level of
defence spending there is less sophisticated, deliverable, reliable bang for the buck with
protection[ism] than without.” 907 While total foreign dependency (the “Gaullist nightmare”) is
scary, the opposite situation (total autarky) can also be frightening if a country is “being tied to a
product of such high price, long delays, and inferior technological performance that the user finds
his own security compromised” 908 .
“It is precisely for this reason that defence procurement controversies can pitch service
chiefs – who are employed to be good judges of security in the narrow sense – on the side of
foreign suppliers against coalitions of politicians and domestic industrialists. Rational
considerations of cost, quality, and technological superiority may well lead to a sourcing of
defence-related equipments, systems, or components with foreign suppliers or foreign-
909 910
owned companies.”
STP advocates argue that countries should pay a “national security premium” to prevent their
strategic industries from getting wiped out by foreign competition. Moran counters that such
protectionist measures should only be used when the foreign-based competitors / suppliers are so
heavily concentrated that they can use “coordinated denial” and manipulation tactics to hurt key
national interests. After all, there is always the possibility of a protectionist / STP backlash from
abroad. “Strategic trade logic has an inherent beggar-thy-neighbour dynamic that an only lead to
provocation, escalation, and retaliation among the major industrial nations.” 911 The “threat of
globalisation” to America’s A&D industry should therefore be understood not as a function of “the
extent of dependence on foreign suppliers” but rather “the concentration of dependence on foreign
suppliers” 912 . Finally, international A&D collaboration allows the countries involved to draw on a
wider technology base and makes it possible to cement political and commercial alliances that, in
turn, reduce the risk of neo-mercantilist backlashes. 913
interventions for economic and national security reasons in other industries, including steel, machine tools, and
semiconductors, has burdened the US aerospace industry with much heavier costs than those borne by European and
Japanese competitors.” (Moran & Mowery, 1991) p. 141
907 Moran (1990) p. 84
908 Ibid., p.67
909 Cable (1995) p. 318
910 The massive political protests sparked by the Pentagon’s February 2008 decision to award the KC-X tanker
competition to NGC-EADS is the example par excellence of a situation where the relevant service (USAF) selected a
foreign bidder / platform (Airbus) only to encounter the fierce resistance by Boeing and its allies in Congress, who
disparaged Airbus as “the French tanker”.
911 Moran (1993) p. 214
912 Moran (1990) p. 85
913 The Nimrod vs. AWACS competition highlights the risks of a neo-mercantilist “national champion” approach and
the benefits of a transnational production strategy providing “insurance against a wider outbreak of economic
nationalism that could inhibit overseas sales”. Kraar (1990). While Boeing’s AWACS offered subcontracting
opportunities to European allies, the UK-only Nimrod consortium was a technological and financial disaster.
196

5.3 The rise of economic rivalries among Western allies in the post-Cold War world
A government’s response to defence dependence is shaped by its military and economic threat
perceptions and its position in the international system. 914 During the Cold War, America had a
vital interest in promoting the indigenous defence industrial capabilities of its European and Asian
allies to create a counterweight to the Warsaw Pact. Military and economic aid, the co-production /
licensing of American weapons, Boeing’s AWACS programme and other US-led joint NATO
procurement initiatives illustrate Washington’s commitment in that regard. Apart from the unifying
Soviet threat, it was America’s hegemonic power position in the West that made the country
“especially immune to relative gains concerns” 915 . The roots of America’s growing foreign
(inter)dependence in economic and military affairs vis-à-vis its allies can be traced back to the early
1970s and first appeared on the radar screen of national security strategists in the early 1980s.
However, it was not until the late 1980s that Paul Kennedy’s “The Rise and Fall of the Great
Powers” 916 – against the backdrop of record US budget deficits and the 1987 stock market crash –
sparked a wider debate about the consequences of American “imperial overstretch” 917 . Kennedy and
his fellow “declinists” 918 were criticised by those who predicted that only America – despite its
undeniable decline in relative economic – had the necessary military, economic, political, social
resources in terms of both “hard” and “soft” power to remain a global superpower. 919
The sudden demise of the Soviet Union, which revealed the US to be the world’s only superpower,
dramatically improved America’s security situation and seemed to prove the “declinists” wrong.
However, analysts also began to debate how long America’s “unipolar moment” 920 would last and
what strategies should be employed to defend the country’s hegemonic role in the world against
potential challengers like Europe, Japan, China, and Russia. 921 According to Huntington,
international primacy – defined as a government’s ability “to exercise more influence on the
behaviour of more actors on more issues than any other government can” – does “matter” and
remains of “central importance” in post-Cold War international politics, both for the United States
and the other (major) powers. 922 From a realist perspective, America’s alliance with Western
914
“The level of threat facing a state is a function not only of the distribution of power but also of the geographic
proximity, offensive capabilities, and, in particular, the perceived intentions of others.” Snyder (1991) p. 126
915
Pages (1996) p. 7
916
Kennedy (1987)
917
Kupchan (1989)
918
Calleo (1987)
919
Nye (1990); Huntington (1988/89)
920
Krauthammer (1990/91)
921
An internal 1992 Pentagon document defined America’s post-Cold War grand strategy in very clear terms: “Our first
objective is to prevent the re-emergence of a new rival […] that poses a threat on the order of that previously posed by
the Soviet Union. […] Our strategy must now focus on precluding the emergence of any potential future global
competitor.” Quoted in Mearsheimer (2001) p. 46
922
Huntington (1993) p. 68
197

Europe during the Cold War (institutionalised through NATO) can be interpreted as a direct
response to the military threat posed by Soviet expansionism. 923 Huntington and other realists
predicted that the absence of this unifying threat would lead to the re-emergence of conflicting
(transatlantic) interests which then trigger “intense conflicts” and struggles for political and
economic primacy between America and its former European allies. 924 925 “The end of a significant
war or conflict, whether among individuals, groups, or states, creates the basis for the generation of
new conflicts” 926 .
Huntington argued that future clashes of interests among America and other major powers would be
“over the distribution of the benefits and costs of economic growth and the distribution of the costs
of economic stagnation or decline” 927 . 928 He rejects the notion that international economic
competition is a positive-sum game where the (governmental) actors involved are concerned about
maximising absolute rather than relative gains. 929 930 Huntington derives classic mercantilist
arguments and policy prescriptions from his background as a hard-core IR realist. Economic power
and technological prowess are the ultimate source and foundation of military might. “All of the
major shifts in the world’s military-power balances have followed alterations in the productive
balances.” 931
“Economists are blind to the fact that economic activity is a source of power as well as
well-being. It is, indeed, probably the most important source of power, and in a world in
923
“[T]he [Cold War] partnership between Europe and the [US] was held together by three unifying forces. The first
and most important was the Soviet threat. The second was America’s economic stake in Europe, which reinforced its
strategic interest in European prosperity. The third was the existence of a generation of European and American elites
whose personal backgrounds and life experiences left them strongly committed to the idea of an Atlantic community.
All three unifying forces are now gone or eroding, and there is little hope of resurrecting them. Walt (1998) pp. 3-11
924
Huntington (1993) p. 71
925
“There is considerable evidence […] that the [US] and its Cold War allies are drifting apart. This trend is most
apparent in Europe, where NATO’s 1999 war against Serbia and its messy aftermath have damaged transatlantic
relations and prompted the [EU] to begin building a force that can operate independently of NATO – meaning the [US].
[…] The [UK], France, Germany, and Italy are slowly but inexorable realising that they want to provide for their own
security and control their own destiny. They are less willing to take orders from the [US] than they were during the
Cold War. Japan, too, is showing signs of independent behaviour.” Mearsheimer (2001) pp. 48-49
926
Huntington, (1993) p. 71
927
Ibid., p. 71
928
“American realists simply see the emerging threat of a new economic hegemon, either Germany alone or France and
Germany together […].”(Wallace & Zielonka, 1998) p. 67
929
Mastanduno (1991) pp. 73-74
930
“Drawing upon historical and empirical evidence, and employing a realist conceptualisation of states as rational
power-maximisers in zero-sum pursuit of their individual interests, [this neo-marxist essay] interprets economic
globalisation as competitive international relations, wherein states employ economic means to attain international geopolitical
power. […] ‘Soft’ geo-politics represents states’ competitive and coercive interactions, using politicaleconomic
tactics to exercise and increase their political clout and maximise their individual economic gain. Economic
globalisation constitutes a foremost example.” Gritsch (2005) p. 2
931
Kennedy (1987) p. 439
198

which military conflict between major states is unlikely, economic power will be
increasingly important in determining the primacy or subordination of states” 932 .
This emphasis on preserving and advancing America’s economic power and technological prowess
conforms to a neo-realist approach, which argues that Washington should respond to the post-Cold
War era – characterised by reduced military threats, growing “foreign dependence” on potential
challengers like Europe, Japan, or China, and the corresponding (relative) decline in US economic
might – by pursuing industrial / economic policies designed to defend America’s international
hegemonic position. Edward Luttwak defined “the pursuit of adversarial goals through economic
means” as “geo-economics” 933 . “As the power of the hegemonic state [i.e., America] declines and
the importance of military threats recedes, [neo-]realists expect the [hegemon] to become more
attuned to relative gains considerations and begin to act more like a “normal” country” 934 . 935 The
transition from the Cold War to the post-Cold War era is thus marked by a shift from military
competition to economic competition as the primary theatre of great-power rivalry.
“In the realm of military competition, the instruments of power are missiles, planes,
warships, bombs, tanks, divisions”. In the realm of economic competition, the instruments of
power are productive efficiency, market control, trade surplus, strong currency, foreign
exchange reserves, ownership of foreign companies, factories and technology.” 936
However, great-power rivalries are never exclusively driven by either military or economic
competition. In theory, one might be able to draw a clear distinction between these two dimensions
of a country’s national power base. In reality though, military and economic factors are inextricably
intertwined as both co-determine a state’s power and influence in the international system. It was
only the combination of superior military and economic-technological resources that – coupled with
the “soft power” appeal of US values like freedom and democracy – laid the foundations for
America’s rise to global superpower status in the post-Cold War era. At the time, all of the other
(potential) competitors for global primacy were lacking either military or economic resources to
rival America. While Russia boasted the world’s largest WMD stockpiles, its economy was in
tatters; Japan commanded impressive economic-technological might but had only a small Self
Defence Force.
932
Huntington (1993) p. 72
933
Luttwak (1990) quoted in Cable (1995) p. 308
934
Pages (1996) p. 7
935
“The model which is implicit in this view is a kind of zero-sum game in which the gains of one country (primacy)
are seen as cancelling out the losses of another (subordination) even if both achieve growing prosperity.” Cable (1995)
p. 308
199

What makes the BMD and EADS merger cases selected for this thesis so interesting is that the
A&D sector is the “strategic, high-technology, high value-added industr[y]” 937 par excellence, with
enormous importance for international military and geo-economic security. 938 In 1991, Huntington
warned his countrymen “to be concerned by the current challenge to American economic primacy
posed by Japan and the possible future challenge that could come from Europe” 939 : 940 While
Huntington focuses on Japan as the immediate threat, it is obvious that a reunified Europe and a
bigger, more powerful EU are viewed as potential (economic) challengers to America’s superpower
status.
“Japanese strategy, behaviour, and declarations all posit the existence of an economic cold
war between Japan and the [US].” 941 […]
“The Japanese government […] has targeted aerospace for rapid development with
government ‘subsidies, loans, and political support’ 942 . If Japan is successful, the future of
Seattle can be seen in Detroit.” 943
Huntington’s comparison between Seattle (home of Boeing) and Detroit (home of the Big Three
carmakers) underscores his mercantilist agenda derived from a hard-core IR realist background.
Only die-hard protectionists would argue that Detroit’s automotive industry should be protected as
a national asset. 944 The competitive threat posed by European A&D companies (Airbus) and the rise
of Japan, China, India, etc. raised the spectre of long-term US decline and loss of national wealth in
a “strategic, high-technology, high value-added industry” critical to bolstering America’s economic,
political, military leadership position in the world. Realists believe that sovereign states – even
those that enjoy strong political, economic, social, and military ties – can never fully trust each
other. Today’s allies can be tomorrow’s enemy. Huntington and Mearsheimer reject the notion that
the “Atlantic Community” had fundamentally transformed the context of international relations,
including international economic relations. It was therefore a full dismissal of liberal
institutionalism as a concept. This hard realist argument has made for a deep ambiguity in US-
936
Huntington (1993) p. 73
937
OTA (1991) p. 9; Huntington (1993) p. 74
938
“In the geo-economic view of the world, a trade deficit is intrinsically undesirable, not merely for its own sake
(imports ‘destroy’ jobs) but because it is balanced by capital inflows – foreign investment or the acquisition of claims
on the federal government so that the ‘US becomes dependent on imports or money from Japan’ and ‘vulnerable to
Japanese threats’.” Cable (1995) p. 309
939
Huntington (1993) p. 72
940
This was the reverse argument to that of Servan-Schreiber’s “Le défi américain”.
941
Huntington (1993) p. 76
942
Stevenson (1992)
943
Huntington (1993) p. 76
944
America’s carmakers have consistently failed to anticipate changes in consumer preferences or in technology and
thus rendered themselves vulnerable to foreign competition. By relying on SUVs sales for too long, Detroit missed the
boat on investing in alternative fuels / engine technologies and the necessity to build smaller, more fuel-efficient cars.
200

European relations, especially in defence industrial cooperation, with some US policymakers
arguing for a balanced “two-way street” and others pushing for the maintenance of unilateral
dominance. This tension has been an underlying ambiguity through successive US administrations.
US and European policymakers have long regarded commercial aircraft exports as semi-political in
nature; not only due to the major revenues and jobs at stake but also because of the growing
technological overlaps between civil and military aerospace. Washington, Paris, and the other
European capitals concerned have repeatedly tried to use their political leverage to help secure
major export deals for Boeing and Airbus, respectively. In 2005, President Bush and Secretary Rice
– lobbied their counterparts in New Delhi to make sure Air India’s US$7 billion purchase of new
commercial aircraft would go to Boeing. 945 Despite French lobbying efforts to promote Airbus, the
Indian government opted for the US firm, prompting European diplomats and business leaders to
complain that Airbus was not given “fair and equal treatment” 946 and that “factors other than
commercial” 947 clinched the deal for Boeing. 948 Similar lobbying efforts involving senior US /
European policymakers have accompanied major aircraft purchases in many other countries (China,
Saudi Arabia, etc.).
The Boeing deal took place in the context of Washington’s strategic rapprochement with India, “a
major Asian democratic power with the potential economic and military strength to counter the
adverse effects of China’s rise as a regional and world power” 949 . It was closed shortly before the
signing of a “New Framework for the US-India Defence Relationship” 950 and the landmark US-
India nuclear deal in June and July 2005, respectively. Washington and New Delhi agreed to
“expand two-way defence trade between our countries […] as a means to strengthen our countries’
security, reinforce our strategic partnership, achieve greater interaction between our armed forces,
and build greater understanding between our defence establishments” 951 . India plans to spend
US$10-12 billion to purchase at least 126 fighter jets by 2011. “[S]ix aerospace companies, backed
by their respective governments, are in intense competition […] for what may be one of the world’s
last great defence contracts” 952 .
945
Cherian (2005)
946
Ibid.
947
Ibid.
948
India might also have selected Boeing to gain US backing for its attempt to become permanent UNSC member and
to ease Washington’s concerns about the widening bilateral trade deficit. Ibid.
949
Richardson (2002) p. 20
950
“New Framework for the US-India Defence Relationship”
951
Ibid.
952
Srivastava (2009). The competitors are: LMC, Boeing, Saab, MIG, EADS-BAE, Dassault.
201

5.4 Major transatlantic M&As after the end of the Cold War
By contrasting large-scale transatlantic M&As in a variety of industries (automotive, banking,
telecommunications) with the absence of transatlantic mergers between A&D primes, this chapter
provides analyses what separates EADS and BMD from M&A transactions in less strategic or even
non-strategic industries. 953 All three selected cases involved successful acquisitions of American
firms by European companies. The term “successful” means that these transactions received
shareholder approval and were not blocked by Washington. It does not imply that these acquisitions
were successful from a financial or corporate strategy point of view.
953 In fact, compared to the automotive or banking businesses, the telecommunications industry is certainly a more
strategic sector of the economy since it raises potential national security concerns related to eavesdropping and
espionage operations conducted by foreign powers. In addition, terrorists might be tempted to attack critical elements of
the US telecommunications infrastructure in an effort to magnify the effects of a terrorist strike (by hampering the
coordination of first responders and other ensuing rescue / counter-terrorism operations).
202

5.4.1 The DaimlerChrysler merger: “a marriage made in heaven”?
When the link-up between Germany’s Daimler-Benz AG and America’s Chrysler Corporation was
completed on 18 November 1998, it ranked as the biggest transatlantic merger and the biggest
industrial merger ever recorded. The deal’s architects, Daimler-Benz CEO Schrempp and Chrysler
CEO Eaton, hailed the US$92 billion merger as a “marriage made in heaven”. In 1998,
DaimlerChrysler (DCX) had a turnover of US$154 billion, an operating profit of US$8.6 billion,
sold 4.4 million vehicles, employed 442,000 people, and had a market capitalisation approaching
US$100 billion. Schrempp hailed DCX as “a merger of equals, a merger of growth, and a merger of
unprecedented strength” 954 . Only ten months passed between first exploratory talks in January 1998
and the merger’s completion in November. The EC and the FTC approved the transaction in July
1998, and in mid-September close to 100 percent of Chrysler and Daimler-Benz shareholders voted
in favour of the merger, thus paving the way for the launch of DCX on 18 November 1998.
Both Daimler-Benz and Chrysler were looking for a suitable partner to attain the size and
economies of scale necessary to survive in a competitive global marketplace. In the US auto
industry, high R&D, labour, healthcare and pension “legacy” costs, increased competition from
cheaper and more efficient Asian carmakers, and incentive programmes were eating into profit
margins. In the mid-1990s, Chrysler ranked as the world’s most profitable car company on a per-
vehicle basis – US$1,076 followed by Toyota (US$540) and Ford (US$534) 955 – driven by SUV,
minivan, and pick-up truck sales. 956 957 That being said, Chrysler had teetered on the brink of
bankruptcy four times since WWII. In each instance, the firm only managed to survive with the
help of massive government bailouts and / or large-scale cutbacks in R&D. It was against this long
shadow of history that Robert Eaton addressed his employees in July 1997 and sternly warned that
Chrysler’s very survival would be at stake in the years to come. “I think there may be a perfect
storm brewing around the industry today. I see a cold front, a nor’easter, and a hurricane converging
on us all at once” 958 . “The cold front was chronic overcapacity, the nor’eastern was a retail
revolution that empowered buyers, and the hurricane was a wave of environmental concerns that
threatened the very existence of the internal combustion engine” 959 . The DCX merger offered
Chrysler an opportunity to weather “the perfect storm” ahead by joining forces with one of the
world’s leading automotive companies. The alternative would have been to remain independent and
954 Graesslin (2000) p. 155
955 “The Harbour Report 1996”
956 Finkelstein (2002) p. 2
957 In the conventional passenger car segment, Chrysler had been losing market share for a long time and its export
record was poor.
958 (Vlasic & Stertz, 2001) p. 174
959 Finkelstein (2002) p. 2
203

isk being swept away by a wave of consolidations which was soon expected to hit an industry
notorious for its overcapacities. 960
Schrempp saw the DCX merger as the crowning moment of his attempt to create a “Welt AG”: a
globally integrated automotive company with strong brands in all key international markets. He
realised that, “as competition became tougher, even Mercedes [the world’s leading luxury brand]
needed greater volume to support the increasingly expensive technological development required to
stay ahead” 961 . 962 Schrempp was careful to present DCX as a “merger of equals”: 963 DCX
established two headquarters (Stuttgart and Detroit), made English the official language, and
appointed Schrempp and Eaton as equal “Co-Chairmen” (Co-CEOs) presiding over 15 board
members (nine Germans and six Americans).
However, the gradual “Germanisation” of DCX’s Managing Board would soon begin. In March
2000, Eaton was handed a golden parachute and sent into early retirement. The head of Chrysler
was asked to leave the company, too. 964 The German take-over was completed in November 2000,
when Dieter Zetsche and Wolfgang Bernhard were installed as top Chrysler managers. Under the
terms of the merger agreement, each Daimler-Benz share was converted into one DCX share while
each Chrysler share was only exchanged for 0.6235 DCX shares. These different “conversion
factors” reflect the different weight of the respective financial assets that the two companies
contributed to DCX. In that sense, the creation of DCX was no real “merger of equals”. In October
2000, Schrempp declared that “Me being a chess player, I don’t normally talk about the second or
third move.” “The structure we have now with Chrysler (as a standalone division) was always the
structure I wanted,” he added. “We had to go a roundabout way but it had to be done for
psychological reasons. If I had gone and said Chrysler would be a division, everybody on their side
965 966
would have said: ‘There is no way we’ll do a deal’.”
There are several reasons why Chrysler and the US government agreed to the DCX merger. First,
CEO Eaton feared that his company would soon be hit by “a perfect storm” threatening Chrysler’s
survival. It seemed only a question of time before Chrysler would be pushed to the brink of
960
Graesslin (2005) p. 24
961
The Economist (2006)
962
“With US$2.8 billion in annual profits, remarkable efficiency, low design costs, and an extensive American
dealership network, Chrysler appeared to be the perfect match.” Finkelstein (2002) p. 2
963
Europeans and Americans shareholders each held 44 percent of DCX.
964
The DCX Supervisory Board subcommittee members in charge of Managing Board appointments were all German.
965
(Burt & Lambert, 2000)
966
Kirk Kerkorian, Chrysler’s largest shareholder prior to the merger, sued DCX for US$3 billion, arguing that the
German take-over bid disguised as a “merger of equals” had denied Chrysler shareholders the higher premiums usually
paid in acquisitions. The lawsuit was dismissed in 2005.
204

ankruptcy or swallowed by one of its competitors. Second, a merger with Daimler-Benz and its
flagship brand Mercedes-Benz – “the epitome of European automotive aristocracy, brimming with
confidence, cash and technology” 967 – promised to provide Chrysler with the necessary financial
and technological clout needed to survive in a competitive international auto industry. For Chrysler,
the timing of the DCX merger was fortuitous. While Chrysler had posted record annual operating
profits of more than US$5 billion during 1998-1999, that figure dropped to US$499 million in
2000. In 2001, Chrysler even swung to a US$2.2 billion loss. DCX’s market capitalisation fell from
US$100 billion in 1998 to US$44 billion in 2001. Three years after the merger, DCX had a market
valuation similar to that of Daimler-Benz prior to the link-up with Chrysler.
Eaton rightly believed that Chrysler only had a narrow window of opportunity to find a merger
partner. During 1998-2006, Chrysler’s share of the US car and light truck market fell from 16 to 13
percent as Asian rivals made further inroads in the American automotive market. In 2006, DCX
earned US$7.3 billion, while Chrysler lost US$1.48 billion. In August 2007, DCX sold 80.1 percent
of Chrysler to US private equity firm Cerberus, and pulled out completely in April 2009. In 1998,
DCX was “the harbinger of a new age of transnational industrialism”. 968 In 2007, the picture was
very different:
“Whether the marriage of [Daimler-Benz] and [Chrysler] was a flawed idea based on
phantom synergies, or whether it was a brilliant concept whose execution was horribly
botched, will be debated within the auto industry and in business schools for years to come.
It’s likely that both are true: The synergies were overestimated and the clash of cultures
made things much worse.” 969
The DCX merger promised Chrysler to gain access to cash, automotive technology, and managerial
expertise from Daimler-Benz. It can therefore be interpreted as an American attempt to “marry up”,
to adopt best managerial / engineering practices, and to allow the US auto industry to boost its
competitiveness to international levels. Since Daimler-Benz – clearly much bigger and stronger
than Chrysler – presented DCX as a “merger of equals”, it is evident that from a business and
national industrial policy perspective, Chrysler and America stood to benefit disproportionately
from this biggest industrial merger ever.
967 The Economist (2001)
968 Ingrassia (2007) analyses why DCX went “so wrong, so quickly”.
969 Ibid.
205

5.4.2 Deutsche Bank’s take-over of Bankers Trust
In June 1999, Deutsche Bank AG (DB), Germany’s biggest bank (US$734 billion in assets),
completed its US$10.1 billion acquisition of Bankers Trust (BT), the eight-largest American bank
(US$133 billion in assets). 970 The DB-BT deal was the biggest foreign take-over of a US bank and
(temporarily) turned DB into the world’s largest commercial banking group. The rationale behind
the acquisition of BT – a bank serving corporate clients – was DB’s desire to join the ranks of Wall
Street’s investment banking powerhouses. As European financial markets were shifting from
corporate lending – DB’s traditional business – to stock underwriting in the 1990s, DB feared that
banks like Goldman Sachs or Morgan Stanley would soon establish a commanding presence on its
home turf. The DB-BT take-over took place against the backdrop of major consolidation in the US
and European financial industry. In January 1998, Union Bank of Switzerland and the Swiss
Banking Corporation engineered a US$24.7 billion merger to form UBS. In April 1998, Citicorp
and Travelers Group created “Citigroup Inc.”, the world’s largest financial services concern. 971
These mergers underscored DB’s need to find a suitable (US) investment banking partner. 972
After DB’s initial talks with J.P. Morgan had failed, it set its sights on BT which, despite its smaller
size, offered the German bank an attractive opportunity to enter the investment banking market.
Following several scandals in the early 1990s that had hurt its reputation and bottom-line, BT
transformed itself from a commercial bank into an “investment banker to the world’s smallest,
faster-growing companies” while at the same time carving out “a niche underwriting and trading
high-yield debt, so-called junk bonds” 973 . In early 1998, BT CEO Newman – a former Deputy
Treasury Secretary in the Clinton administration – had made it clear that his company wished to
remain independent. However, following BT’s loss of almost US$500 million in connection with
the Russian financial crisis in August 1998 and a sharp drop of the company’s stock, the BT board
urged Newman to explore merging with a bigger bank to ensure the company’s survival. Between
20 October 1998 – when the FT first reported “preliminary” DB-BT take-over talks – and the end of
November 1998, BT’s share price increased from US$55 to US$87. This was still below DB’s
US$93-per-share offer finalised on 30 November 1998. DB CEO Breuer made it clear from the start
that this transaction was a German-led take-over and no transatlantic “merger of equals”: “We don’t
believe in autonomy as an instrument of management and leadership. […] [W]e want a centralized
management of the business.” 974
970 Fed (1999) p. 2
971 (O’Brien & Treaster, 1998)
972 Financial Times (1998) and Corrigan (1998)
973 (O’Brien & Holson, 1998)
974 Andrews (1998)
206

Regulatory approval for the deal was thrown into doubt in February 1999, when an internal DB
investigation unearthed documents suggesting it had lent money to construction companies that
built the Auschwitz camp. This revelation caused a massive backlash from leaders of New York’s
influential Jewish community, including the city’s comptroller Alan Hevesi, who had himself lost
relatives in the Holocaust. There were also allegations that DB had “before and during [WWII],
collaborated with the Nazi regime to confiscate and liquidate Jewish assets, and that the bank
financed or controlled other companies that used slave or forced labour” 975 . Finally, there were
concerns that DB “may have handled gold stolen by the Nazis” 976 . Hevesi asked the Federal
Reserve (Fed) not to approve the DT-BT take-over “until all interested parties agreed on a structure
to settle all Holocaust-era claims” 977 . Just a year earlier, Hevesi helped coordinate a boycott against
Swiss banks that had illegally seized the unclaimed deposits of thousands of Holocaust victims. 978
Jewish groups like the World Jewish Congress (WJC) were not only threatening to block the DB-
BT take-over. The WJC also considered making DB the target of an international disinvestment
campaign – similar to the sanctions imposed on South African companies during Apartheid. In May
1999, Berlin announced that 13 of the country’s major German banks, insurers, and industrial
companies had agreed on the creation of the “Foundation Initiative of German Enterprises:
Remembrance, Responsibility, and Future” to help the victims (and their surviving heirs and family
members) of Nazi-era confiscation of (Jewish) assets and slave / forced labour. 979 The companies
(including DB) recognised that the risks of current and future lawsuits made it imperative to reach a
Swiss-style “global” settlement of all Nazi-era claims. Due to Germany’s multi-billion dollar
compensation fund and pressure from the DoS, the WJC and influential Jewish individuals like
Hevesi (who had no jurisdiction over the DB-BT deal) had dropped their opposition to the DB-BT
take-over by May 1999. Hevesi recommended that the Fed base its M&A review “exclusively on
the […] [transaction’s] impact on the banks, the public, and the financial community” 980 .
Furthermore, “a [DoS] official had warned [the Fed] that opposition to the merger on political
grounds could chill the [US] economy” 981 . The DoS stressed that “sanctions against German banks
are not justified and would only retard progress on Holocaust-related issues” 982 .
975 Fed (1999) p. 16
976 Ibid., p. 16
977 Ibid., p. 18
978 Swiss banks offered US $1.25 billion as a global Holocaust claims settlement in order to end all legal and diplomatic
sanctions.
979 Sanger (1999)
980 Fed (1999) p. 18
981 AP (1999)
982 Fed (1999) p. 18
207

The DB-BT transaction was unanimously approved by the Fed governors on 20 May 1999. The Fed
concluded that the take-over “would not result in any significantly adverse effects on competition or
on the concentration of banking resources in the New York banking market or any other relevant
banking market” 983 . Regarding the Holocaust-related objections to the deal, the Fed made it clear
that many of these concerns were not within the “limited jurisdiction” of its DB-BT regulatory
review. To the extent that some of the Holocaust-related concerns had legal relevance for the anti-
trust review, the Fed “considered, in particular, the past efforts of [DB] to investigate and address
its Holocaust involvement, and the forthcoming and ongoing efforts of current management to
resolve these matters” 984 . In sum, the Holocaust-related objections did not “warrant denial of the
[DB-BT] proposal” 985 .
983 Ibid., p. 6
984 Ibid., p. 18
985 Ibid., p. 19
208

5.4.3 Deutsche Telekom’s take-over of VoiceStream
After overcoming massive opposition by protectionist-minded Congressional lawmakers, Deutsche
Telekom’s (DT) US$26 billion acquisition of US wireless carrier VoiceStream (VS) was completed
in May 2001. Given VS’s size and financial performance – 2.3 million customers; 1999 turnover of
US$665.7 million with a US$580 million loss – the company was an expensive acquisition
target. 986 987 DT viewed the deal as an entry to the lucrative US market and announced the “creation
of the world’s only global GSM operator” 988 . VS CEO Stanton hailed the DT link-up as “a
compelling strategic opportunity for [VS] to partner with one of the world’s leading
telecommunications companies” 989 . He also praised the deal “as an extremely attractive opportunity
for both sets of shareholders and for our employees”. Finally, Stanton pointed to the “enormous
benefits for US consumers, as [VS] becomes an even more competitive national operator that can
accelerate the introduction of next-generation wireless voice and data services such as mobile
Internet and multimedia applications” 990 .
What drew the ire of US lawmakers was the fact that at the time of the merger announcement,
former German monopolist DT was still majority-owned by the government. While the VS
acquisition would reduce Berlin’s stake to 45.7 percent 991 , this was well above the 25-percent
foreign government ownership limit imposed by US law. In theory, the Federal Communications
Commission (FCC) could waive that restriction if the proposed transaction was in the public
interest. 992 Congressional opposition formed quickly after the DT-VS deal was announced. On 21
July 2000, 30 Republican and Democratic lawmakers – led by Senator Ernest Hollings (D-SC)
circulated a “Dear Colleague” letter stating that they were “not opposed to private foreign
investment in the telecommunications industry”, but that “we did not deregulate US
telecommunications to permit the regulated foreign government-owned telecommunications
companies to take over the US market” 993 . If the US allowed such take-overs, they could reduce
free competition since government-owned firms “can raise staggering amounts of capital and the
financial markets assume that their governments will not allow them to fail” 994 . Senator Hollings
also invoked national security and privacy concerns, noting that American telecommunication firms
986
On a per-subscriber basis, DT-VS was the most expensive acquisition of a wireless carrier to date. (Sorkin &
Romero, 2000)
987
Schmid 2000)
988
DT (2000) p. 18
989
Ibid., p. 3
990
Ibid., p. 3
991
Ibid., p. 9
992
However, as Senator Hollings pointed out, “the FCC has never waived, in any significant fashion, the law for foreign
government ownership”. Hollings (2000)
993 (Sorkin & Romero, 2000)
994 Ibid.
209

owned by foreign government-controlled companies could eavesdrop on their customers and
possibly track their whereabouts.
Hollings – initially backed by Senate Majority Leader Lott (R-MS) – attached two amendments to a
Senate appropriations bill to derail the DT-VS deal. The first amendment would have prevented the
FCC from transferring any American telecommunications license to DT for one year. The second
amendment would have permanently banned any transfer of US telecommunications licenses to any
company owned at least 25 percent by a foreign government – thus removing the FCC’s
corresponding waiver authority. In response to the concerns voiced by 30 Senators, FCC Chairman
Kennard indicating that “I believe, as you do, that the commission’s approach must promote
competition and maintain a secure telecommunication system for our national security” 995 . The DT-
VS bid would therefore face “close scrutiny” 996 . While Kennard left open the possibility of
approving the DT-VS deal, it became clear that the German telecommunications giant was facing a
long regulatory battle with an uncertain outcome.
However, Senator Holling’s opposition to the DT-VS deal was neither shared by all of his
colleagues in the Senate, nor by many other powerful players in the nation’s capital. Senator
McCain (R-AZ) circulated his own “Dear Colleague” letter warning of the potential backlash
abroad against the new protectionism at home:
“Although it would be easy to envision new foreign restrictions on US programming,
satellite launches and the like, foreign governments’ retaliation would not necessarily be
confined to the telecom sector. Any foreign market in which American companies are
vigorous participants could be fair game.” 997
The White House called Senator Hollings’s initiative “unnecessary”, arguing that the mandatory
DT-VS merger reviews by the FCC, DoJ, USTR, and CFIUS would safeguard American economic
and national security interests. 998 999 The EU, too, moved quickly to defend DT against protectionist
sentiments on Capitol Hill. On 26 July 2000, Trade Commissioner Lamy sent a strongly-worded
letter to the USTR, urging Washington to oppose the Hollings bill: “This would clearly violate
995 FCC (2000)
996 Ibid.
997 Labaton (21 July 2000)
998 Labaton (24 July 2000)
999 For more information on the inter-agency DT-VS transaction review process, see Goodman (2000).
210

commitments in the WTO and would affect very substantial interests of European companies.” 1000
The EU threatened to refer the case to the WTO if the measure were to pass.
On 7 September, Congress held its first hearing on the issue. That same day, the DT-VS acquisition
also cleared its first hurdle when the DoJ’s merger review deadline passed without objections. 1001
Furthermore, Senate Majority Leader Lott had abandoned his opposition to the merger, following
lobbying efforts by Republican Senator Gorton from VS home state Washington. To further turn
the heat on Hollings, DT and VS hired several top lobbyists over the summer who forged a high-
profile alliance of “strange bedfellows” in favour of the proposed merger: trade union AFL-CIO 1002
and the Chamber of Commerce. 1003 The two powerful organizations – strong adversaries on
virtually all other trade issues – joined forces “to defeat a bill they see as a threat to foreign
investment and union jobs in telecommunications” 1004 . The White House, too, reiterated its strong
opposition to Senator Hollings’s initiative in early September, pointing out that it had already
threatened to veto the relevant appropriations bill because of a different amendment opposed by
President Clinton.
On the regulatory front, FCC Chairman Kennard made it clear in early October that his agency was
not yet ready to clear the DT-VS deal, raising the spectre of a prolonged merger review. 1005 On the
political front, in contrast, DT and VS scored a major breakthrough on 26 October 2000, when
Senator Hollings and his allies decided to drop their proposed protectionist DT-related
amendments. 1006 In view of the White House’s credible veto threat, the defection of Senate Majority
Leader Lott, as well as the vocal support for DT-VS from influential trade unions and business
groups, it had become clear that the Hollings amendment would not go anywhere before the US
Presidential / Congressional elections on 7 November. In December 2000, the FBI, the DoJ, and
DT-VS filed a joint petition asking the FCC to delay approval of the proposed merger to allow the
four players involved to resolve any related US national security issues. According to the FBI:
“Granting the authority requested by the parties [DT and VS] in this transaction could
present significant impediments to the ability of our government to meet its obligations to
1000 Reuters (July 2000)
1001 (Srinivasan & AP, 2000)
1002 AFL-CIO = American Federation of Labor and Congress of Industrial Organizations
1003
Reuters (October 2000)
1004
Ibid.
1005
Spiegel (2000)
1006
Ibid.
211

the citizens to preserve the national security, enforce the laws and protect the public
safety.” 1007
The FBI and the DoJ wanted to ensure that they retained the ability to tap any VS calls originating /
ending in America and to detect any foreign eavesdropping on such calls. In January 2001, DT and
VS reached an agreement with the FBI that guaranteed US law enforcement officials’ access to the
VS network. 1008 In April 2001, the FCC finally approved the DT-VS deal, arguing that it would
provide “public interest benefits for US consumers” warranting a waiver of the existing 25-percent
limit on direct / indirect foreign government control of American phone licenses. 1009
1007 Spiegel (11 January 2001)
1008 Spiegel (18 January 2001); FCC (2001) pp. 43-45
1009 Spiegel (18 January 2001)
212

5.5 Moving both towards and away from aerospace and defence industrial globalisation
Free-market advocates are probably tempted to interpret the massive rise of cross-border A&D
industrial collaboration in recent decades as a clear indicator that changing industry dynamics, the
continuing push for trade liberalisation, and the intense competitive pressures of an increasingly
integrated global economy have created the necessary conditions to gradually transform this
“strategic” industry into a “normal” economic sector. However, realist / neo-mercantilist concerns
about the potential national security / economic risks associated with foreign dependence,
unauthorised technology transfers / proliferation, and the implications of foreign ownership,
control, and influence vis-à-vis the US domestic A&D industrial base continue to resonate with
relevant American policymakers. These concerns largely explain why Washington preferred the
kind of post-Cold War ethnocentric A&D industrial consolidation that resulted in the BMD merger.
It is important to recognise that the dominant international position of the American defence
industry provides Washington with considerable political influence vis-à-vis friends and foes alike:
“The global defence industrial sector is a remarkably accurate indicator of the stratification
of power in the post-Cold War international system. As in the overall system, the [US] plays
the dominant role in this sector, and US policymakers use their comparative advantage to
influence foreign affairs. [This sector] provides the [US] with the ability to encourage states
1010 1011
to cooperate, reward compliance, and punish non-cooperation.”
“Arms-producing countries, regardless of their former position in the defence industrial
hierarchy, have become increasingly dependent upon the [US] for sales, technological
innovation, and the advanced technologies needed to modernise their own militaries and
defence industries. This growing dependency has granted the [US] considerable direct and
indirect political leverage. From the perspective of non-US governments, the price of
entering the US market is increasing US influence over the direction of their technological
development, the stability of their military industries, and the autonomy of their foreign
policy decisions.” 1012
Any full-scale mergers of equals between US mega-primes and their European competitors would
have almost inevitably eroded America’s technological leadership position in this strategic industry
1010 Neuman (2006) p. 429
1011 “The array of incentives and rewards the [US] has to offer for cooperation is quite broad. It includes the offer of
military credits, offset arrangements, technology transfers, loans, economic aid, joint ventures, different forms of
military assistance, and the removal of penalties—whether they are arms embargoes, technology transfer restrictions,
onerous export regulations, or high transaction costs.” Ibid., p. 447
1012 Ibid., p. 451
213

and thus have significantly reduced Washington’s ability to enjoy the direct and indirect political
leverage derived from it. Such transatlantic mergers would have made the unauthorised transfer of
sensitive US technologies much more likely; they would also have given the US government far
less influence and leverage than is the case under the constraints of an ethnocentric consolidation of
the American A&D industry. MNCs active in many different jurisdictions are far less vulnerable to
political / governmental interference than companies with an easily identifiable “home country”. If
most of a firm’s R&DP facilities, top management, and revenue base are in a single country, that
government invariably enjoys more direct and indirect influence over corporate decisions. The
recurring haggling between Paris and Berlin over control of EADS is a prime example of the
problems resulting from an A&D company that is subject to the political pressures and interferences
of more than one “home government”.
While the importance of privileged access to the US market and the sheer size of the Pentagon
acquisition budget would have ensured that Washington still enjoys unparalleled political leverage
over any transatlantic mega-primes, one must realise that a European government allowing its
national champion to merge with an American firm would have insisted on certain national security
safeguards (“golden shares” with veto power over strategic M&A decisions, sensitive arms exports,
etc.). Any such European influence / veto power over transatlantic mega-primes would have led to a
corresponding decline in Washington’s ability to leverage the A&D sector in pursuit of its own
national interests.
US policymakers and business executives are clearly struggling with the fact that the A&D industry
is caught between two worlds: realism / neo-mercantilism vs. liberalism / globalisation:
“[SIPRI] 1013 contends that the US defence industrial sector has opted for certain kinds of
global and transnational initiatives while avoiding others. Whereas the [US] is eager to
exploit foreign sources of technology, it simultaneously seeks to protect itself from becoming
too dependent upon foreign suppliers. Only about 4 percent (US$7 billion) of total Pentagon
procurement during FY02 was for overseas contracts, and of that less than 1 percent was
for military hardware. It is, SIPRI contends, a policy of moving both towards and away from
defence industrial globalisation.” 1014
America is both the world’s leading arms exporter and the country least dependent on defence
imports. In 1999, US weapons imports amounted to less than 5 percent of its defence exports. For
1013 SIPRI = Stockholm International Peace Research Institute
1014 Neuman (2006) p. 430
214

the UK, France, Germany, and Russia, that figure stood at 50, 28, 68, and 16 percent
respectively. 1015 As the world’s only superpower, Washington is the biggest promoter and economic
/ political benefactor of defence exports while, at the same time, it is also the country most
concerned that the forces of globalisation will erode the international leadership position of its
A&D industry. On the one hand, the post-Cold War internationalisation of the defence industry as
well as the launch of major weapons procurement programmes in Eastern Europe, the Middle East,
etc. has been a boon to US mega-primes, which were able to capture more than two-thirds of global
arms export contracts in 2008. 1016 1017 On the other hand, American mercantilists and realists fear
that the growing internationalisation of the US megaprimes’ underlying supplier networks in
commercial (Boeing’s “Dreamliner” cooperation with Japan, etc.) and military aerospace (LMC’s
JSF subcontracting agreement with BAE 1018 1019 ) poses direct risks for America’s national security
and economic competitiveness. 1020 Since 1997, Washington has registered a sharp increase in
foreign collection efforts targeted at critical US defence / dual-use technologies such as information
systems and aeronautics.
Repeated US policy statements in favour of a genuine “two-way street” in transatlantic defence
trade notwithstanding, the Pentagon has continued to procure just a very small percentage of its
military hardware from Europe, thus demonstrating that national security concerns / American
distrust of NATO allies, neo-mercantilist economic considerations, and the effectiveness of
Congressional defence of US industrial lobbies are powerful factors in an otherwise “broken” US
defence acquisition system. 1021 1022 1023 “[T]he US military services greatly dislike foreign
1015 Table 2, Arms Imports as Percentage of Arms Exports for the 35 Largest Arms-Producing Countries, Ibid., p. 437
1016 During 2001-2008, weapons exports to the developing world accounted for an average of 65 percent of all such
deals globally. In 2008, America accounted for 70 percent (US$29.6 billion) of all new arms transfer agreements with
the developing world. In terms of global arms transfer agreements, Washington also ranked first with US$37.8 billion
worth of transactions (68 percent of all such deals sealed last year). In 2008, US arms deliveries world-wide totalled
US$12.2 billion (38 percent market share). All figures are expressed in constant (2008) dollars. CRS (2009) p. II; 33
1017 The huge difference between the 2008 US share of global arms transfer agreements (68 percent) and actual arms
deliveries (38 percent) indicates that American defence companies have in recent years gained significant competitive
advantages over their foreign rivals and are bound to strengthen their dominant position in the coming years. Ibid., pp.
32-33
1018 According to a 2008 DoD report, “advanced aviation and weapons technology in the [JSF] programme may have
been compromised by unauthorised access at facilities and in computers at [BAE]” – LMC’s most important foreign
subcontractor on this biggest defence acquisition project in US history. That same report also accused BAE that it had
failed to provide the Pentagon with security audits for the 2001-2003 period on the grounds that “all information
contained in the internal audits was privileged and not available to the [US] government”. Sevastopulo (2008)
1019 The JSF programme has also benefited from substantial technology transfers from the UK to the US (primarily
vertical take-off and landing techniques and technology).
1020 The DoD report warned that “incomplete [BAE] contractor oversight may have increased the risk of unintended or
deliberate release of [classified] information to foreign competitors. [BAE] has a prominent role in providing
technologies to other countries for the JSF programme while it is also under contract to develop a competing aircraft.”
DoD (2008) p. 12
1021 GAO (March 2009)
1022 (Cordesman & Kaeser, 2008)
215

dependence, an attitude that arguably presents a more formidable barrier to European company
market access than the […] [relevant] laws and regulations.” 1024 In view of these realist / neo-
mercantilist concerns, the prevention of “merger of equals” between US and foreign / European
A&D primes coupled with the pursuit of an ethnocentric consolidation approach in this strategic
sector has been a key element in Washington’s attempt to preserve and defend its post-Cold War
hegemonic status against all challengers, friends and foes alike.
US policymakers were much more open to M&A transactions in “normal” industries like
telecommunications, banking or automotive. Germany’s partly state-owned DT was able to
overcome protectionist / national security concerns in Congress to acquire VS, the first foreign take-
over of a major US telecommunications carrier. The White House and leading Democratic and
Republican Senators specifically backed DT’s bid for fear that a blocking of this transaction could
provoke retaliatory action by Germany, the EU, and other allies. In the case of the DB-BT deal, the
biggest foreign take-over of a US bank, the German company was able to overcome strong
opposition by New York’s influential Jewish community related to DB dealings in Nazi Germany.
While DB’s financial support for the launch of a multi-billion dollar German industry foundation to
compensate Nazi-era victims certainly helped its BT bid, the US government was again lobbying
for the deal to go through for fear that its blocking could threaten bilateral relations with Europe’s
biggest economy. Against the backdrop of the many other high-profile transatlantic mergers that
took place during the second half of the 1990s, one can convincingly argue that the globalisation /
free market narrative was very compelling for business leaders and policymakers on both sides of
the Atlantic. However, when it came to the US A&D industry, realist / neo-mercantilist arguments
prevailed and ensured that Washington pursued an ethnocentric rather than transnational
consolidation approach.
1023 “These problems have roots in not only the acquisition process, but also in the requirements and funding processes.
Collectively, these processes create pressures to demand high performance, keep cost estimates low, and proceed with
calendar-driven versus knowledge-driven schedules.” GAO (April 2009) p. ii
1024 Grant (1997) p. 115
216

Chapter 6: Building Europe and Balancing the American Hegemon
6.1 The emergence of CFSP and ESDI 1025
This chapter analyses the EADS merger in its wider European and transatlantic political context.
EADS was fostered by the culmination of two inter-connected geopolitical trends in the 1990s: the
first trend pertained to the EU’s drive to create an “ever closer Union” at the political, economic,
and military level; the second trend related to growing transatlantic tensions with America and
Europe’s corresponding desire to chart its own course in world affairs, with only minimal
interference from Washington. Viewed from these perspectives, the EADS merger can be explained
by neo-liberal institutionalist and realist approaches. The functionalist / interdependence school
promoted by neo-liberals argues that by the late 1990s, political and economic integration between
the EU’s core member states – France and Germany in particular – had reached such a high level
that the governments concerned were willing to allow a full-fledged merger of their respective
A&D “national champions”. Realists claim that the attempt by key EU member states “to balance
against the American hegemon” – i.e., to create an effective counter weight to Washington’s vast
power and influence, and the anticipated dominance of the “new Boeing” in the A&D industry –
played a decisive role in bringing the EADS founding nations together. At the time of the EADS
merger, France and Germany’s left-wing Red-Green government were the key drivers behind the
attempt to give the EU a more independent and less Atlanticist posture. The major transatlantic
clashes in the run up to the 2003 Iraq War would subsequently further cement the Paris-Berlin
partnership, embodied at its climax by the close personal and political ties between President Chirac
and Chancellor Schroeder.
From its inception, the process of European integration, led by France and Germany, served both an
economic and a political purpose. In economic terms, the European Economic Community (EEC)
“was essentially a compromise between German interest in market liberalisation, and the French
interest in support for agriculture” 1026 . 1027 Until German reunification in 1990, the process of
European integration was based on this informal Franco-German “grand bargain”: Germany served
as Europe’s economic powerhouse and assumed only a very limited role in foreign and security
policy. 1028 France, in turn, tried to harness Europe’s collective political, economic, and military
resources to increase its standing and prestige in the world, which was built on the “force de
frappe”, membership of the P5 in the UNSC, and “les relations privilégiées” with francophone
1025 ESDI = European Security and Defence Identity
1026 Pedersen (1998) quoted in Cole (2000) p. 9
1027 Washington played an indispensable role in fostering Franco-German reconciliation and Western European
integration after WWII. “The integration of Western Europe began in the post-war period under US leadership and US
protection.” (Menon, Forster, & Wallace, 1992) p. 100
1028 Germany had no nuclear weapons, long-range ballistic missiles or strategic bombers.
217

states around the globe. From the end of WWII to the present day, France’s great-power ambitions
have been driven by the concept of “Gaullism” 1029 , a grand strategy defined as follows:
“A cultural attachment to European values and civilisation, notably as embodied by
France; a Europe prepared to protect its industry and agriculture; the promotion of
common European policies where these do not endanger French interests; a marked anti-
Americanism and advocacy of a more independent security and defence identity; a tight
Community based on a Franco-German directorate, rather than a looser, more nebulous,
grouping of nations; and a preference for intergovernmental over supranational
institutions.” 1030
From a Gaullist perspective, the EADS merger advanced several of France’s key objectives,
including the protection of Europe’s A&D industry and the creation of an independent EU security
and defence policy, both of which would help counter US dominance in the post-Cold War era. For
de Gaulle and subsequent French leaders, a strong Franco-German partnership led by Paris was the
conditio sine qua non of a strong Europe that could chart its own course in world affairs, fending
off the immediate Soviet threat while preventing America from dominating the West through
NATO. During the Cold War, French leaders tried repeatedly to make West Germany choose
between Paris and Washington (and between the EU and NATO) and challenged US / Anglo-Saxon
dominance of the Alliance by pushing for a more equal European-US partnership and more intra-
European political / military cooperation instead. 1031 West German leaders tried to avoid making
that difficult choice, stressing their commitment to both a strong Europe and a strong transatlantic
partnership embodied by NATO. However, “when forced to choose, Germany preferred the security
offered by the US nuclear umbrella over the dubious French alternative, especially because de
Gaulle refused to extend nuclear protection to the Germans”. 1032 1033 While the 1963 Elysée Treaty
included important provisions concerning bilateral defence collaboration, the Bundestag – in
response to active US political lobbying beyond the capacities of the French leadership – adopted
such a strongly pro-Atlanticist preamble 1034 that Paris “saw no point in implementing the defence
clauses of the Treaty” 1035 . De Gaulle pulled France out of NATO’s integrated military structure in
1029
For an analysis of how Gaullism shaped French and European space policy see McDougall (1985) pp. 179-203
1030
Cole (2000) pp. 58-59
1031
(Menon et al., 1992) pp. 100-102
1032
Cole (2000) p. 13. France’s Hades missiles strained Franco-German relations during the 1980s / 1990s as these
short-range nuclear weapons were designed to strike (East) Germany in the case of a Soviet attack.
1033
There are also other assessments: “If a decision was forced, Paris was more important to Bonn than London, the
preferred (if difficult) partner with which German governments had worked closely for more than 30 years. However,
Washington was as important as Paris, because the [US] offered a special relationship for global economic cooperation,
as well as for European security.” (Menon et al., 1992) p. 105
1034
The Bundestag reaffirmed its commitment to “the common defence in the framework of [NATO]”.
1035 (Menon et al., 1992) p. 101
218

1966. 1036 1037 It was not until the early 1980s that Franco-German security and defence co-operation
received a major boost under President Mitterrand and Chancellor Kohl, who activated the Elysée
Treaty’s dormant defence provisions. In 1987, Kohl and Mitterrand agreed to launch the 4,200-
strong Franco-German Brigade 1038 , a unit expanded into “Eurocorps” four years later before being
merged into the European Rapid Reaction Force (ERRF). 1039
The end of the Cold War and German reunification in 1990 were watershed events, both in terms of
Franco-German / intra-European and transatlantic relations. For France, Germany’s unexpected
reunification was a rude awakening. President Mitterrand, like much of the rest of the French
political elite, feared that a stronger, reunified Germany would no longer be a compliant partner and
could feel tempted challenge France’s political leadership position within the EC. 1040 In terms of
transatlantic relations, the end of the Cold War and the demise of the Soviet Union provided France
and Germany with much more strategic leeway to chart their own course in world affairs;
independent from America and NATO if necessary. 1041 The Alliance, under US leadership, was also
embarking on its own transformation process. In July 1990, shortly before German reunification,
Alliance leaders gathered in London “to transform NATO from a Cold War to a post-Cold War
alliance”, notably by becoming “less military and more political in nature”. 1042 “The London
Declaration” 1043 launched four new political initiatives: 1044 first, NATO vowed to “enhance the
political component” of the Alliance, second, it called on the Warsaw Pact to issue a joint
declaration in which the two would “solemnly state that we are no longer adversaries”, three,
NATO proposed that the Soviet Union and the other Warsaw Pact members “establish regular
diplomatic liaison with NATO”; finally, the Alliance suggested that the upcoming CSCE 1045
Summit in November 1990 “decide how the CSCE can be institutionalized to provide a forum for
1036
“[F]rom 1966, […] a policy of membership of the Atlantic Alliance without participation within NATO became a
central plank of French foreign and security policies”. Menon (2000) p. 2
1037
“[N]on-integration served to reinforce France’s quest for wider foreign policy aims: military autonomy, along with
a certain standing on the world stage, or grandeur.” Ibid., p. 3
1038
The Franco-German Brigade was very much a symbolic exercise as there was no common basis for rules of
engagement or deployment. During the late 1980s, the Brigade was one of the least wanted postings in the French army,
because soldiers were least likely to do anything interesting while attached to that unit.
1039
While Eurocorps was “[i]mportant as a symbol of closer Franco-German collaboration, in practice [it] performed a
marginal role in security debate in the 1990s”. Cole, (2000) p. 115
1040
Fears of a resurgent Germany also arose in the UK, where Prime Minister Thatcher strongly opposed German
reunification.
1041
“In short, to France, the end of the Cold War allowed NATO to move towards eliminating the [integrated military
structure], removed the military need for the [US] and NATO to be the central players in West European security, and
created a real possibility for Western Europe to construct a serious defence entity.” However, “France’s immediate
post-Cold War vision of European security autonomy was too radical for Washington and most of the other allies.”
Grant (1996) pp. 59-60
1042
Art (1996) p. 12
1043 NATO (1990)
1044 Art (1996) pp. 12-13
219

wider political dialogue in a more united Europe”. 1046 “Together with the decision to institute a
fundamental review of NATO’s military strategy, the Bush administration succeeded in launching
NATO’s transformation so as to maintain it as the ‘new’ Europe’s central security institution.” 1047
1048
The launch of “Operation Desert Storm” in January 1991 to liberate Kuwait put security and
defence issues on top of Europe’s nascent CFSP agenda. However, different European countries
drew different conclusions from the war. 1049 For Britain, this successful US-led UN intervention
underscored the importance of maintaining close security and defence ties with America since
Europe was simply too weak to project its military power abroad. For France, which needed US
logistical support to deploy to Kuwait, the Gulf War illustrated the urgent need to beef up Europe’s
defence capabilities – independent of NATO and the US. Germany, due to its pacifistic post-WWII
Basic Law, stayed out of any direct military involvement and engaged in “chequebook diplomacy”
instead. “[L]ooking for ways of overcoming this handicap, [Bonn] kept a low profile and supported
the French when it was safe to do so.” 1050
The 1992 Maastricht Treaty launched the EU and declared as one of its objectives “the
implementation of a common foreign and security policy including the eventual framing of a
common defence policy, which might in time lead to a common defence”. The Treaty also “requests
the [WEU], which is an integral part of the development of the Union […] to elaborate and
implement decisions on actions of the Union which have defence implications”. Furthermore, the
nine WEU members 1051 (all of which were part of the EC) vowed “to develop WEU as the defence
component of the [EU] and as a means to strengthen the European pillar of the Atlantic Alliance”.
The other key Maastricht provision – the creation of the Euro – was “a stratagem to end Germany’s
exclusive power to set Europe’s interest rates” 1052 by disempowering the Bundesbank. While
Germany was reluctant to abandon the Deutschmark, Kohl realised that this was the price to pay for
French support for German reunification. By firmly anchoring reunified Germany in a closely
integrated EU, Kohl wanted to allay fears about another German “Sonderweg”.
1045
CSCE = Conference for Security and Co-operation in Europe
1046
NATO (1990)
1047
Art (1996) p. 13
1048
“In the early 1990s, Mitterrand’s ambitious European initiatives were an almost complete failure. Europe failed to
equip itself with a security organisation capable of rivalling a NATO which, despite France’s best efforts, succeeded in
reforming itself and expanding its tasks.” Menon (2000) p. 4
1049
Nuttall (2000) pp. 9-10
1050
Ibid., p. 9
1051
UK, France, Germany, Italy, Belgium, Netherlands, Luxembourg, Portugal, Spain.
1052 Art (1996) p. 15
220

Going into the Maastricht negotiations, a familiar pattern emerged. Britain was strongly committed
to NATO as Europe’s premier security and defence organisation. 1053 London, however, was not
determinedly sceptical about closer European defence, as demonstrated by the Eurogroup and St.
Malo initiatives. Ultimately, Britain wanted to build real military capabilities rather than pass lofty
declarations with empty promises. 1054 Paris, in contrast, viewed WEU as “the crucible of a
European defence rooted in the Community and the second pillar of the Atlantic Alliance”. 1055 “The
French retained their traditional suspicion towards NATO, the [IMS], and the institutionalized US
leadership within it.” 1056 France also insisted that the EU required a robust defence component.
Germany was caught in the middle, torn between its strong bilateral ties with France and the long-
standing commitment to NATO / the US. Despite their close relationship, Kohl and Mitterrand had
major differences over how to achieve “political union”. Germany favoured a supranational
approach characterised by a strong Commission / Parliament, and qualified majority voting, even in
CFSP matters. 1057 France staunchly defended its national sovereignty and favoured an EU driven by
intergovernmental politics. The contradiction of the French position was that Paris wanted a strong
CFSP, but without yielding any more authority to the supranational institutions. “France’s tendency
to seek leadership, to distrust integration, and to resort to Europe only when it could not achieve its
ends alone […] served to alienate its partners.” 1058
Washington feared that a CFSP that was “too big, robust, and capable would marginalise the [US]
and gut NATO” 1059 by draining scarce resources away from the Alliance and fostering the
emergence of a “European caucus” within the organisation. 1060 1061 1062 The CFSP discussion was,
1053 However, it was Prime Minister Thatcher’s idea to revive WEU, which she saw as “a forum for co-operation among
European countries and a bridge to NATO”. Nuttall (2000) p. 154
1054 “The British style in the negotiations stressed ‘practical’ measures rather than ‘rhetorical’ declarations; its aims
were minimalist and incremental. British negotiators characteristically wanted to discuss details and implications before
they agreed to accept principles.” (Menon et al., 1992) p. 104
1055 Nuttall (2000) p. 154
1056 (Menon et al., 1992) p. 104
1057 “French rhetoric concerning the need for Europe sat uneasily in German eyes with continued emphasis on a military
strategy that seemed to protect France alone and was even for many years based in part on the deployment of nuclear
weapons [Hades missiles] targeted on German soil.” Menon (2000) p. 5
1058 Ibid., p. 5
1059 Art (1996) p. 19
1060 Washington was concerned that the European allies would first reach agreement among themselves at the EC / EU
level, before then dealing with America en bloc.
1061 “[E]fforts to construct a European pillar by redefining and limiting NATO’s rule, by weakening its structure, or by
creating a monolithic bloc of certain members would be misguided. […] [W]e are concerned over the proposals that the
WEU should be subordinated to the European Council, thereby developing a European security component – solely
within the EC – that could lead to NATO’s marginalisation”. Excerpts from the DoS’s 20 February 1991 “Bartholomew
/ Dobbins telegramme” to 11 European NATO members.
1062 “The French tendency to equate France’s international influence with its ability to stand up to the [US] increasingly
irritated Washington, which came to oppose the creation of the kind of European defence structures desired by Paris on
the grounds that France’s hidden agenda was to drive the US out of Europe.” Menon (2000) p. 5
221

ehind the scenes, very much a Franco-US clash, as the two countries represented opposite poles in
this debate. 1063 1064 Ultimately, Washington decided “that it was wiser to roll with the fall” 1065 and
provided at least rhetorical backing for the idea of a “European Security Identity and Defence Role”
as well as a “European pillar within the Alliance” 1066 . The British, Dutch and Germans did not
agree to the Maastricht text until the NATO negotiations were concluded (with a commitment to a
new alliance strategy); even then, the language of the EU Treaty was highly conditional. 1067
Nonetheless, the Maastricht Treaty negotiations marked an important first step towards defining
Europe’s role on security and defence matters in the post-Cold War era.
“The impression outside observers gained in the summer of 1992 was of a shift of attitude in
all major European capitals, away from the rhetoric that had characterized so many
previous West European defence initiatives towards a concern to build an effective structure
for defence policy co-ordination, with at least some elements of military integration.” 1068
1069
Europe’s faltering efforts to get its security and defence act together (Yugoslav Wars) coincided
with President Clinton’s 1994 call on the Alliance’s European members to assume more
responsibility and “burden-sharing”. 1070 Washington wanted the allies to transform themselves from
Cold-War net security consumers into post-Cold-War net security providers without threatening
American / NATO primacy on the Old Continent. Fostering Europe’s military capabilities while
making sure it does not turn into a strategic competitor has been a key post-Cold War challenge in
US foreign and security. While there was a certain Franco-American NATO rapprochement during
1992-1995 – exemplified by enhanced military coordination between France and NATO in Bosnia,
French participation in NATO defence minister meetings, etc. – President Mitterrand refused to
bring France any closer to NATO. 1071
1063
“The [US] sought to undermine French [CFSP initiatives] even as it was formally acknowledging in NATO
declarations that European defence cooperation could reinforce both European security and the Alliance. […] The
inflexibility in both US and French positions was mutually reinforcing, and led to open competition between European
and transatlantic approaches to security. […] The overall tone of the period […] was one of intense competition
between French and US security policies.” Grant (1996) p. 60
1064
Menon (2000) pp. 39-44; 44-48
1065
Heisbourg (1992) p. 672
1066
NATO (1991)
1067
The NATO and EU negotiations were in parallel. European governments could (or would) not agree with France
unless / until the relevant Maastricht provisions concerning CFSP had been first reconciled within the NATO
framework (and thus with Washington).
1068
(Menon et al., 1992) p. 117
1069
In 1992, the WEU adopted its “Petersberg tasks”: “humanitarian and rescue tasks”, “peacekeeping tasks” as well as
“tasks of combat forces in crisis management, including peacemaking”. WEU (1992)
1070
Heisbourg referred to the transatlantic burden-sharing debate as “the old chestnut of Cold War days”. Heisbourg
(1992) p. 677
1071 Menon (2000) p. 48
222

The 1995 election of President Chirac provided fresh impetus for France’s “creeping
reintegration” 1072 into the Alliance, especially as French leaders recognised their own military limits
and the fact that they could only built a stronger Europe within, but not against NATO /
Washington. 1073 1074 1075 “In both political and military terms, France’s ability to play a significant
unilateral international role decreased markedly.” 1076 Chirac signalled France’s willingness to rejoin
NATO’s integrated military structure under certain conditions and was thus was ready to break “the
last taboos of Gaullism” 1077 . Paris specifically pushed for the “Europeanisation” of NATO
commands and demanded that Alliance assets be available for EU-led military operations. The 1996
NATO Berlin Summit translated the Alliance’s previous ESDI commitments into concrete
actions: 1078 European allies, operating through WEU, were given the possibility to use NATO assets
(command & control systems, intelligence and reconnaissance information, AWACS, etc.) 1079 for
WEU-led operations where the US, Canada, Turkey, etc. were not involved. The Clinton
administration hailed this decision as a “major foreign policy shift” 1080 since it allowed for the
establishment of WEU military capabilities which were “separable but not separate” 1081 from those
of NATO. 1082 Furthermore, Washington agreed to the appointment of a European Deputy SACEUR
to lead future (WEU-led) CJTF 1083 operations. However, decisions about the potential use of
Alliance “assets and capabilities” in WEU-led operations would be made on a case-by-case basis,
each time requiring a consensus vote in the NAC (North Atlantic Council). 1084 As a result,
Washington or Ankara enjoyed effective veto powers over core European security and defence
matters. In recent years, the Turkish government – angered by the EU accession of Cyprus (a
country not recognised by Ankara) and the slow progress and uncertain outcome of its own EU
membership talks – has used its seat on the NAC to block closer NATO-EU cooperation. This
1072 (Ghez & Larrabee, 2009) p. 78
1073 “Europe’s failure to do more than contain the conflict in former Yugoslavia; the extreme difficulties in obtaining
ratification of the Maastricht Treaty in France as well as in a number of other European countries; and the sharp decline
in military spending and manpower in virtually all NATO countries combined to frustrate French hopes that there
would be relatively rapid, significant progress on ESDI.” Ibid., p. 63
1074 “While during the initial post-Cold War period France saw NATO as, at best, irrelevant to the development of ESDI
and, at worst, as a major obstacle to it, the French view shifted towards recognising NATO as a necessary instrument in
the building of ESDI.” Ibid., p. 63
1075 Menon (2000) pp. 49-55
1076 Ibid., p. 3
1077 Cole (2000) p. 118
1078 Ibid., p. 117
1079 NATO has only few truly collective assets as most of its military capabilities are composed of national forces
earmarked to the Alliance.
1080 Gardner (1996) p. 31
1081 “What this means is that there would be two chains of political decision-making (a NATO chain and a European
chain), but only one set of military assets that each would utilise, not two political chains and two sets of military
assets.” Art (1996) p. 31
1082 For an analysis of the CJTF concept, see Cragg (1996) pp. 7-10.
1083 CJTF = Combined Joint Task Force
223

Turkish veto concerns not only the use of NATO assets through CJTFs in EU-led operations but
also the sharing of classified information between the two institutions. 1085
For Paris, the Berlin Summit was just the beginning, and not the end, of its attempt to negotiate a
full return to NATO. Specifically, Chirac argued that a European should take over the
AFSOUTH 1086 command with responsibility for the important Mediterranean / Middle East
regions. 1087 The issue came to a head in August 1996, when Clinton told Chirac that Washington
would not give AFSOUTH to the Europeans. While Chirac responded in October with a
handwritten note in English underlining the “capital importance of the southern command for
France”, it soon became clear that Washington would not budge. Relations between Paris and
Washington soured noticeably in late 1996 / early 1997, despite German attempts to mediate. In the
campaign running up to the May 1997 elections that defeated conservative Prime Minister Juppé (a
close Chirac ally), the Socialists decried the controversial NATO negotiations as a sell-out of
France’s core national interests to America. The acrimonious French debate over NATO reform put
the “decades-long tug-of-war between Gaullist pride and Cartesian logic” 1088 on full display. In July
1997, President Chirac and newly elected Socialist Prime Minister Jospin declared that the
circumstances were not right for France’s full return to NATO. Chirac had clearly overbid his hand
by demanding Naples. US forces were by far the strongest AFSOUTH component and Washington
was not prepared to put these important military assets under French command. 1089 At NATO’s July
8-9 Madrid Summit, Washington rejected another French demand, namely that Romania and
1084 Malcolm Rifkind, UK Foreign Secretary during 1995-1997, commented that the CJTF concept provided for Europe
“as much autonomy as that enjoyed by an adolescent borrowing the family car to go out on Saturday night”. Menon
(2000) p. 136
1085 Michel (April 2007) p. 1. Paris, too, has been working behind the scenes to prevent closer EU-NATO collaboration,
information sharing, etc. France’s primary motivation seems to be the fear that the US-dominated NATO could hijack
CFSP, thus putting the Europeans in a position of inferiority and dependency vis-à-vis Washington.
1086 AFSOUTH = Allied Forces Southern Europe
1087 “The French […] had reasons to complain about imbalances in the distribution of military commands. This was
reflected in the situation in the Mediterranean prior to the withdrawal of the French fleet in 1959. [Allied Forces
Mediterranean] was under the command of a British officer, under whom were placed all national fleets in the
Mediterranean except the American Sixth Fleet. Of the six subordinate sectors, France had command of only the
western Mediterranean sector. This remained the case even after, at the end of the 1950s, the British naval presence was
sharply reduced, leaving the French Mediterranean fleet as the largest allied naval presence after the American Sixth
Fleet.” Menon (2000) p. 30
1088 Michel (April 2007) p. 1
1089 “Chirac came very close to achieving France’s full reintegration into the Alliance in 1996-1997. Indeed, had he
been a bit more modest in formulating his conditions for France’s return, his efforts might well have succeeded.
However, Chirac’s price for agreeing to full reintegration was regarded by the Clinton administration as too high and
the deal ultimately collapsed.” (Ghez & Larrabee, 2009) p. 78
224

Bulgaria be part of NATO’s first round of enlargement. 1090 As Ron Asmus concludes, the failure to
bring France back into NATO caused Chirac to “[retreat] back into Gaullist anti-Americanism”. 1091
In June 1997, EU members had finalised the Amsterdam Treaty, which incorporated the WEU’s
“Petersberg tasks” and created the post of “High Representative for Common Foreign and Security
Policy”. 1092 The Treaty also declared that “The progressive framing of a common defence policy
will be supported, as [m]ember [s]tates consider appropriate, by co-operation between them in the
field of armaments.” 1093 By 1997, however, it had become clear that years of negotiations, summits,
and lofty NATO / EU declarations had done little to achieve what the French commonly refer to as
“l’Europe politique” – an EU that can muster the political will and military resources necessary to
defend its foreign policy and security interests in the world. The major transatlantic compromises of
the “Eurodefence debate” about Europe’s post-Cold War security architecture favoured a prominent
role for America / NATO and seemed to marginalise the EU’s nascent CFSP: “Paris found itself
faced to face with a NATO that had taken over European security and now carried out all manner of
military and politico-military tasks, without having reformed itself in a manner that satisfied
Paris.” 1094
1090 Washington was only willing to admit Poland, Hungary, and the Czech Republic. However, given the limited
transformation of Romanian and Bulgarian armed forces, intelligence services, and political elites from the pre-1989
era, most other European NATO members did not support France’s position either.
1091 Asmus (2007)
1092 In September 1999, Javier Solana became the first “High Representative” and was also appointed WEU Secretary-
General in anticipation of a WEU-EU merger.
1093 Art. J.7.1 of the Amsterdam Treaty
1094 Menon (2000) p. 60
225

6.2 The ESDP breakthrough: from St. Malo to Helsinki and beyond
“Put into perspective, the development of a common EU security and defence policy
between December 1998 and December 2000 was almost revolutionary compared with the
slow progress made during the preceding half century, at least in terms of political
commitments and policy guidelines.” 1095
The origins of this revolution can be traced back to the autumn of 1998, when Britain’s new Labour
Prime Minister Tony Blair made a historic political U-turn and began pushing for a stronger EU
security and defence role. Blair first used an EU gathering in Austria 1096 in late October and a
policy address in Edinburgh in early November to road-test his ideas. In a clear departure from the
UK’s traditional Atlanticist outlook, the prime minister expressed disappointment about the EU’s
limited ability to undertake autonomous military action and called on his EU counterparts to
undertake the necessary changes in terms of institutional reforms and resource allocations to make
the EU a more equal partner of the US within NATO. 1097 The big breakthrough happened at the
British-French Summit at St. Malo on 4 December 1998, which “effectively launched ESDP” 1098 . In
their landmark “Joint Declaration on European Defence”, Blair and Chirac agreed that “the [EU]
needs to be in a position to play its full role on the international stage” and that “it will be important
1099 1100
to achieve full and rapid implementation” of Amsterdam provisions on CFSP”:
“To this end, the Union must have the capacity for autonomous action, backed up by
credible military forces, the means to decide to use them, and a readiness to do so, in order
to respond to international crises. […]
In order for the [EU] to take decisions and approve military action where the Alliance as a
whole is not engaged, the Union must be given appropriate structures and a capacity for
analysis of situations, sources of intelligence, and a capability for relevant strategic
planning, without unnecessary duplication, taking account of the existing assets of the WEU
and the evolution of its relations with the EU. In this regard, the [EU] will also need to have
recourse to suitable military means (European capabilities pre-designated within NATO’s
European pillar or national or multinational European means outside the NATO
framework). […]
1095 Rutten (2001) p. ix.
1096 Rutten (2001) pp. 1-3
1097 Ibid., p. 14
1098 Michel (November 2007)
1099 (Blair & Chirac, 1998)
1100 “The biggest single stumbling block to both a […] CFSP and an ESDP has been the inability of France and Britain
to agree on fundamentals.” Howorth (2000) p. 33
226

Europe needs strengthened armed forces that can react rapidly to the new risks, and which
are supported by a strong and competitive European defence industry and technology.” 1101
1102
Blair wanted to show the UK’s commitment in an area where it had much to contribute 1103 as well
as to challenge other EU governments to improve defence spending and force modernisation.
Underlying this approach was “the British government’s conviction that the US will no longer
underwrite European security in the same way as during the Cold War” and that “enhanced
European military capability is […] the most effective means of silencing the voices of isolationism
or, more importantly, the advocates of ‘burden sharing’ on Capitol Hill” 1104 . 1105 Chirac, who
recognised that building ESDP against NATO was not feasible 1106 , had two St. Malo objectives.
First, he tried to regain the initiative on defence issues following his failed AFSOUTH gambit;
second, Chirac wanted to challenge Germany to restructure its forces and equipment programmes
on the French model (which was inspired by Britain’s 1998 SDR) 1107 1108 : reduce forces geared to
territorial defence, prioritise expeditionary units; abolish conscription; improve military lift
capabilities, increase defence equipment spending, particularly on satellites, airborne surveillance,
“smart weapons”, etc. 1109 Sadly, St. Malo failed to shift the German position very much. The
rapprochement between France and Britain – two countries that have been described as “mirror
images” 1110 1111 in their approach to foreign and security policy – was brought about through
1101
(Blair & Chirac, 1998)
1102
Blair’s 1997 election platform accused the Tory government of having neglected the British defence industrial base,
with corresponding adverse effects on national security and the country’s high-technology sector. Blair also vowed to
develop a new UK defence industrial strategy. McInnes (1998) p. 828
1103
Blair’s St. Malo / ESDP initiative was “a major expression of political will in an area where firm policy initiatives
and robust executive actions are less dependent on building a constituency of public support than may be the case in
other areas of policy [monetary union, etc.].” Howorth (2000) p. 34
1104
Ibid., p. 35
1105
“For the UK, the starting-point is of the best means of maintaining [NATO], and the solution has been identified as
the creation of [ESDP].” Ibid., p. 36
1106
“For France, ESDP is first and foremost a European project, which nevertheless assumes readiness, when necessary,
to make use of an Atlanticist instrument, NATO.” Ibid., p. 36
1107
UK MoD (1998)
1108
“Britain’s [SDR] is a good model for rethinking priorities and redesigning forces that are more sustainable, mobile,
deployable, and flexible.” (Schake, Bloch-Lainé, & Grant, 1999) p. 26
1109
Ibid. pp. 25-27
1110
“French diplomacy and security policy-making is known for its awareness of strategic vision; a clear understanding
driven from the very top of what it wants to achieve in a medium- to long-term time frame, based around a shared sense
of its own identity and purpose, imbued with confidence in the national role France should play. […] This can make it
long on political rhetoric and short on practical implementation. British policy-making, by contrast, is known instead
for its short-term practicality. A concern to get the details right, a natural suspicion of strategic visions; based on a
pervading uncertainty that goes back at least to the 1930s about the role Britain should play in the world, and now in
Europe.” Clarke (2000) p. 729
1111
“Issues such as state versus market / civil society; territorial defence versus force projection; conscription versus
professionalism; deepening versus enlargement; institutional priorities versus capabilities; strategy versus tactics;
political will versus pragmatism; and, above all, Europeanism versus Atlanticism (in which France has traditionally
epitomised the former and Britain the latter) still complicate the finer details of Franco-British cooperation.” Howorth
(2000) p. 35
227

effective cooperation in Bosnia, after initial hesitation. 1112 The UK and France alone accounted for
50 percent of Europe’s defence procurement expenditures and had the largest forces deployable
1113 1114
outside Europe.
St. Malo took the Clinton administration by surprise and raised concerns that London could be led
off its pro-transatlantic track by France’s neo-Gaullist agenda. 1115 Like Chancellor Kohl before,
Blair tried to reassure Washington that his liaison with the French would reinforce NATO by
improving Europe’s military burden-sharing with America. While US policymakers initially
seemed to give Blair the benefit of the doubt, Secretary Albright published an op-ed three days after
St. Malo to express Washington’s ESDP concerns through the famous “Three Ds” 1116 : no
decoupling, no duplication, no discrimination. First, ESDP should not undermine NATO by de-
linking America from its European allies. Second, ESDP should not duplicate the Alliance’s efforts
as “defence resources are too scarce for allies to conduct force planning, operate command
structures, and make procurement decisions twice – once at NATO and once more at the EU”. 1117
The St. Malo declaration ran counter to that as it only referenced avoiding “unnecessary”
duplication. Third, ESDP should not discriminate against non-EU NATO members.
NATO’s 1999 “Operation Allied Force” against Serbia revealed sharp quantitative and qualitative
disparities in American and European military capabilities, especially in areas like secure
1118 1119
communications, reconnaissance, precision-guided ammunitions, and all-weather aircraft
1112
“The reasons why the UK, in 1998, crossed the Rubicon are entirely compatible with realism – as indeed is the
explanation for France’s 1995 rapprochement with NATO. Both France and Britain came to the conclusion that
cooperation with each country’s former bête noire (NATO and European defence) was, henceforth, in their own
national interests.” Ibid., p. 34
1113
In 1999, the UK and France accounted for 24.6 percent (US$33.3 billion) and 21.0 percent (US$28.4 billion),
respectively, of the total defence expenditures (US$135.2 billion) by the “old” European NATO allies. Germany’s share
was 17.6 percent (US$23.8 billion). The Pentagon budget that same year amounted to US$252.4 billion (64.0 percent of
all defence spending by all “old” NATO members). In terms of defence R&D, the UK and France accounted for 43.7
percent (US$3.9 billion) and 35.2 percent (US$3.1 billion), respectively, of all such spending by the “old” European
Alliance members in 1999. Germany spent US$1.3 billion (14.1 percent). That same year, US defence R&D spending
was US$35.3 billion (79.9 percent NATO share). Finally, in terms of military procurement, the UK and France
accounted for US$8.3 billion (30.4 percent) and US$5.2 billion (19.3 percent), respectively, of all such spending by the
“old” European NATO members. Germany spent US$3.7 billion (13.7 percent). The US spent US$47.1 billion on
defence procurement that year (62.4 percent NATO share). All figures (in constant 1997 US$) calculated by author
based on IISS (1999), Table 8, p. 37.
1114
“Since the end of the Cold War, the UK has provided the largest and most effective non-American contingent in
three US-led extra-European conflicts: the first Gulf War in 1991; the intervention in Afghanistan since 2001; and the
second Gulf war of 2003 and the subsequent occupation of Iraq.” (Wallace & Phillips, 2009) p. 267
1115
Sloan (2000) pp. 15-16
1116
Albright (1998) p. 22
1117
Ibid., p. 22
1118
IISS (1999), pp. 30-31
1119 th
In response to the NATO imbalances exposed in Kosovo, Alliance leaders seized on the occasion of NATO’s 50
anniversary summit in Washington in April 1999 to launch the “Defence Capabilities Initiative” (DCI), which focused
228

While the Americans dominated the aerial bombing campaign, it was French and UK forces that
took the lead in deploying to Kosovo after Serbia had backed down, thus overcoming President
Clinton’s long-time reluctance to commit US ground troops. 1120 1121 The Summit Communiqué and
the new Strategic Concept 1122 adopted by NATO leaders in Washington affirmed, for the first time
ever, Europe’s need “to have the capacity for autonomous action so that it can take decisions and
approve military action where the Alliance as a whole is not engaged”. 1123 NATO also emphasised
the need to make this strengthened European role compatible with the “Three Ds” earlier outlined
by Secretary Albright. While Washington was happy with NATO’s handling of St. Malo, the
initiative’s implementation at the EU-level became increasingly a source of concern.
“[…] American disappointment at Europe’s unwillingness to accept US leadership
unconditionally has fluctuated between despair over European political incoherence and
fear that the European allies might agree on a framework for integration different from
what Washington had prescribed.” 1124
At the EU’s 1999 Cologne Summit – which coincided with the final phase of the Kosovo War and
was hosted by Germany’s new Red-Green government – European leaders declared that the EU
requires “a capacity for autonomous action backed by credible military forces” and that “the EU
will need a capacity for analysis of situations, sources of intelligence, and a capacity for relevant
strategic planning”. 1125 Furthermore, the leaders agreed “to further develop more effective European
military capabilities from the basis of existing national, bi-national, and multinational capabilities
and to strengthen our own capabilities for that purpose”. 1126
“We also recognise the need to undertake sustained efforts to strengthen the industrial and
technological defence base, which we want to be competitive and dynamic. We are
determined to foster the restructuring of the European defence industries amongst those
States involved. With industry we will therefore work towards closer and more efficient
defence industry collaboration. We will seek further progress in the harmonisation of
on mobility and deployability, sustainability, effective engagement, survivability, and interoperable communications.
Robertson (2001) pp. 50-51
1120 “NATO […] experienced tensions due to the fact that the US supplied about 85 percent of the effective power in the
bombing campaign, a figure which demands reflection about European readiness for independent security policies.
Only with the entry of KFOR (Kosovo Force) into Kosovo in June was the imbalance in military burden-sharing visibly
redressed.” Roberts (1999) p. 119
1121 US troops constituted 15 percent of KFOR and were primarily deployed in the relatively safe Eastern part of
Kosovo.
1122 NATO (1999)
1123 Ibid.
1124 (Wallace & Zielonka, 1998) pp. 65-66
1125 European Council (June 1999)
1126 Ibid.
229

military requirements and the planning and procurement of arms, as Member States
1127 1128
consider appropriate.”
This reference to defence industry restructuring was certainly the result of French lobbying. Prior to
Cologne, France and Germany held two bilateral meetings and vowed to strengthen Europe’s
defence industrial base:
“A l’heure de la globalisation, nous favoriserons les projects industriels ou technologiques
communs dans la perspective de pôles européens, notamment dans le domaine des
industries aéronautiques et de défense, de l’intégration des marches financiers et du
développement de la société de l’information.” 1129
“A Toulouse, la ville qui symbolise la coopération franco-allemande dans le domaine
aéronautique, nous affirmons que la construction d’une Europe de la sécurité et de la
défense exige le développement d’une base industrielle et technologique forte, dynamique et
performante. La restructuration des industries d’armement et le renforcement de notre
coopération en ce domaine contribueront à la réalisation de cet objectif.” 1130
Washington followed the EU’s post-St. Malo steps with growing unease. “[F]ollowing St. Malo
[…] and […] Cologne, it appeared that something different was being created – something that
might not in the long run serve Alliance interests.” 1131 1132 In October 1999, Deputy Secretary of
State Talbott expressed concerns that the EU had strayed from ESDI’s CJTF and “European pillar”
concept in an effort to achieve more political-military [ESDP] autonomy from the Alliance in
defence matters than was either necessary or conducive to stronger transatlantic relations. 1133
Talbott also discussed the “vexatious issue of defence industry collaboration” and promised to
“explore new ways to promote technology-sharing, streamline licensing production, and encourage
appropriate joint ventures.” 1134 . However, he emphasised that Washington would “[guard] against
1127
Ibid.
1128
“If this [Cologne Declaration] is to become a reality, increases in defence spending, or at least a radical reallocation
of resources, along with genuine collaboration in defence procurement, are necessary.” IISS (1999) p. 290
1129
Final Declaration of the Franco-German Summit in Potsdam on 1 December 1998. Rutten (2001) p. 4
1130
Declaration of the Franco-German Defence and Security Council in Toulouse on 29 May 1999. Ibid., p. 40
1131
Sloan (2000) p. 24
1132
“Alliance interests” should be interpreted as code for “US interests”. American officials tend to elide Alliance and
American interests, just as French officials elided French and European interests.
1133
“We do not want to see an ESDI that comes into being first within NATO but then grows out of NATO and finally
grows away from NATO, since that would lead to an ESDI that initially duplicates NATO but that could eventually
compete with NATO.” […] [T]he EU leaders’ declaration at Cologne in June […] could be read to imply that Europe’s
default position would be to act outside the Alliance whenever possible, rather than through the Alliance.” Talbott
(1999)
1134
Ibid.
230

illicit and dangerous transfers of sensitive know-how and equipment”. 1135 To this day, national
security concerns are being used by Washington as powerful arguments against closer transatlantic
defence industrial cooperation.
In November 1999, two weeks after the EADS agreement, French foreign minister Védrine
famously stated that “We cannot accept a world that is politically unipolar or culturally uniform.
Nor can we accept the unilateralism of the single hyperpower. This is why we are fighting for a
multipolar, diversified, and multilateral world.” 1136 The British-Franco Summit in London later that
month made the strengthening of Europe’s collective military capabilities a top priority.
Foreshadowing decisions subsequently confirmed at the EU Summit in Helsinki on 10-11
December 1999, London and Paris called on the EU to be able to deploy up to 50,000-60,000
soldiers and relevant air / naval combat forces for “the most demanding crisis management
operations” 1137 within 60 days and sustain them in operations for at least one year. They also
affirmed that the strengthening of Europe’s military capabilities will “need the support of a strong
and competitive European defence industry”: 1138
“We want European strategic airlift capabilities to be strengthened substantially. […]. We
note the common European need for new transport aircraft.” […]
“The restructuring of the European [A&D] industry is a major step which will help improve
competition in the global market. We welcome this recent consolidation and restructuring of
European defence companies […]. The strengthening of our armaments will foster the
development of European technological capabilities and will allow transatlantic
cooperation to develop in a spirit of balanced partnership. We look forward to early
progress toward the establishment of Airbus as a single commercial business and a fully
united management.” 1139
The Franco-German Summit a few days later hailed EADS as “a major step forward” in making
“substantial progress” on ESDP. 1140
“Conscients de l’importance d’une base industrielle technologique forte et compétitive, nos
deux pays se félicitent vivement de l’avancée majeure que constitute le rapprochement de
1135
Ibid., p. 57
1136
Védrine (1999)
1137
(Blair & Chirac, 1999)
1138
Ibid.
1139
Ibid.
1140
(Chirac & Schroeder, 1999)
231

nos industries d’armement au sein de la nouvelle EADS. La fusion [AM] / DASA facilitera
notre coopération autour de programmes communs.” 1141
With the lessons of Kosovo fresh on their minds 1142 1143 , EU leaders gathered in Helsinki in
December 1999 to make the creation of a 60,000-strong ERRF 1144 that can be deployed within 60
days and be sustained for one year for EU-led operations across “the full range of Petersberg tasks”
their joint – albeit voluntary – Headline Goal to be accomplished by 2003. 1145 While EU leaders
agreed “to develop an autonomous capacity” to decide and conduct their own crisis management
operations independent of the US-led alliance if necessary, they also affirmed that (1) “NATO
remains the foundation of the collective defence of its members” 1146 , that (2) the realisation of the
Headline Goal would avoid “unnecessary duplication” of NATO assets, and that (3) it did “not
imply the creation of a European army”. 1147 The Helsinki Summit also established three new
political-military bodies to give the EU the necessary institutional capacity to conduct crisis
management operations. 1148
“Decades of failure to make progress on common defence, coupled with declining defence
expenditures, do indeed provide cause for scepticism as to whether the EU will finally back
up its rhetoric with action.”[…]
“The central issue at hand is capability. As long as Europe delivers on capability, the
necessary institutional changes [within NATO] will be forthcoming.” 1149
Ultimately, ESDP’s success hinged on capabilities. If the EU members were not able to match their
ambitious rhetoric with smarter, more efficient defence procurement and a fundamental
restructuring of their militaries, it would be impossible to achieve the Headline Goal.
1141
Ibid.
1142
„Whatever the arguments surrounding the decision to use force in Kosovo, and its consequences, what mattered for
both analysts of European security capabilities and institutions, and for European leaders was the widespread sense of
disappointment, frustration and even failure over the scale of the effort mounted by European forces compared to that of
the [US]. […] Once again, as earlier in the 1990s, Europeans appeared weak and incapable when responding to a
security challenge in their own ‘backyard’ – the Balkans.” (Cornish & Edwards, 2001) p. 588
1143
“In the aftermath of the Kosovo War, Europe is forging ahead on the defence front with an unprecedented
seriousness of purpose and collective will.” Kupchan (2000) p. 16
1144
Given the rotational schedules of expeditionary forces, the 60,000-strong ERRF will require a total of 180,000
soldiers to sustain an operation for at least a year: 1/3 of the force is deployed in the field; 1/3 is recovering; 1/3 is in
training.
1145
European Council (December 1999)
1146
Ibid.
1147
Ibid.
1148
(1) Political and Security Committee (PSC); (2) Military Committee (MC); (3) Military Staff (MS). The EU also
agreed that (1) “modalities will be developed for consultation, cooperation, and transparency between the EU and
NATO […]”; and (2) appropriate arrangements will be defined that would allow, while respecting the Union’s decisionmaking
autonomy, non-European NATO members and other interested states to contribute to EU military crisis
management”; Ibid.
1149
Kupchan (2000) pp. 26; 28
232

“This is not fundamentally a problem of gross resources – European allies spend two-thirds
to three-quarters as much on defence as the [US] and have nearly half-again as many
troops under arms. The central task is more efficient, more focused, better-planned and
coordinated use of such resources.” 1150
“[W]hatever the level of defence spending, moreover, the fielding of advanced European
military systems is delayed by the inability or unwillingness of European governments to co-
operate among themselves more closely on R&D, including the definition of R&D priorities,
the consolidation of laboratories and testing facilities across national boundaries, and the
integration of national development and purchasing offices. [...] The transatlantic gap is not
at the level of basic technologies; rather it is at the level of integrating these technologies
into suitable defence applications.” 1151
In the 1990s / 2000s, European countries launched several initiatives outside and inside the EU
framework to address key obstacles to the creation of stronger European military capabilities:
“Europe’s armament sector has remained fragmented into national markets, with costly duplication
in all armaments-related areas (procurement bureaucracies, research activities, industrial capacities
and defence programmes).” 1152 The 1992 WEAG (Western European Armaments Group) 1153 and
the 1996 WEAO (Western European Armaments Organisation) shared the same overall objectives:
“more efficient use of resources, in particular through better harmonisation of requirements,
opening up of national defence markets to cross-border competition; strengthening of the European
defence technological and industrial base; and cooperation in [R&D].” 1154 Ultimately, however,
these WEU-affiliated institutions “suffered from a lack of both interest and political support from
national authorities” 1155 and were closed down. European armaments cooperation was also
hampered by continuing differences over the “juste retour” principle. In November 1996, France,
Germany, Britain, and Italy established OCCAR 1156 in an effort “to provide more effective and
efficient arrangements for the management of existing and future collaborative [European]
armament programmes”. OCCAR tried to develop “a more flexible calculation of industrial ‘juste
retour’, replacing the strict application of ‘cost-share equals work-share’ on a project-by-project
basis by a multi-year / multi-programme balance” 1157 : “global juste retour”. However, given the
significant delays and cost overruns of the A400M – which is seen as OCCAR’s key test – and the
1150 Kramer (2000) p. 5
1151 CSIS (2003) pp. IX-X
1152 Schmitt (August 2003) p. 10
1153 WEAG was created in 1992, when IEPG’s activities were transferred to WEU.
1154 Schmitt (August 2003) p. 20
1155 Ibid., p. 22
1156 OCCAR = Organisation Conjointe de Coopération en matière d’Armement
1157 Schmitt (August 2003) p. 24
233

fact that the Organisation’s other armaments programmes are rather limited in scope, OCCAR has
established at best a mixed track record so far.
European NATO defence spending (as a percentage of GDP) continued to decline after Helsinki.
That benchmark reached 2.09 percent in 1999; 2.02 percent in 2000; 1.97 percent in 2001; and 1.93
percent in 2002. 1158 “The weakness of Europe’s economies, together with the constraints imposed
by the EU Stability and Growth Pact and the absence of any increase in the public’s threat
perception, suggest that the current constraints on European NATO defence budgets will
persist.” 1159 The UK did restructure its armed forces and augmented the defence budget to
implement the 1998 SDR. Military expenditures reached GBP23.5 billion in 2001, and increased to
GBP24.2 billion and GBP25.6 billion in 2002 and 2003, respectively. 1160 France, too, boosted its
defence spending – especially on procurement and R&D – following the election of a conservative
government in 2002. The MoD budget reached EUR28.4 billion in 2001, before increasing to
EUR28.9 billion, EUR31.3 billion, and EUR32.4 billion in 2002, 2003, and 2004 respectively.
Defence procurement reached EUR12.5 billion 1161 and EUR13.6 billion in 2002 and 2003,
respectively. 1162 That figure increased 9.5 percent to reach EUR14.9 billion in 2004, which was
partly used to buy new Rafales and “to restock the military with spare parts so that fighter,
helicopter, transport, and tanker fleets can return to full strength” 1163 . Germany, in contrast, cut its
defence budget from EUR23.9 billion in 2001 to EUR23.6 billion in 2002, before spending
EUR24.4 billion and EUR24.1 billion in 2003 and 2004, respectively. 1164 Germany’s low
equipment expenditures increased from EUR3.5 billion in 2002 to EUR3.88 billion and EUR3.99
billion in 2003 and 2004, respectively. However, the Bundeswehr was forced to slash key
acquisition programmes to cut costs “as the 2008 procurement bow head approache[d]” 1165 .
Ultimately, the EU did not match its ambitions with the necessary defence spending to address the
Headline Goal’s capability shortfalls.
1158 IISS (2003) p. 245
1159 Ibid., p. 242
1160 Ibid., p. 250
1161 IISS (2002) p. 248
1162 IISS (2004) p. 272
1163 IISS (2003) p. 243
1164 In 2004, Germany spent 51.2 percent of its defence budget on personnel expenditures. That figure is even higher if
one also takes into account military pensions, which are paid from a different budget. IISS (2004) p. 273. In contrast,
Germany spent very little on military equipment, which made it a weak partner for France in weapons system
development (A400M, etc.).
1165 IISS (2003) p. 243
234

In July 2004, the European Defence Agency (EDA) was established to better coordinate Europe’s
defence activities and to achieve greater efficiencies in procurement programmes. 1166 1167 As part of
ESDP, EDA 1168 embraced the identification and redressing of Headline Goal shortfalls in the EU’s
military and defence capabilities as its “fundamental agenda” 1169 . EDA also “[promotes] European
cooperation on defence equipment, both to contribute to defence capabilities and as a catalyst for
further restructuring the European defence industry” 1170 . In November 2005, the 26 EDA defence
ministers agreed to a voluntary, non-binding Code of Conduct (CoC) for defence procurement
contracts valued at least EUR1 million beginning in July 2006. 1171 1172 1173 While EDA specifically
conceived the CoC to encourage competition in the areas previously exempt from the Common
Market under Art. 296 TEU 1174 , the fact that the CoC has no formal enforcement powers constitutes
a major structural weakness. 1175
With about 80 permanent staff and a first-year budget of EUR20 million, EDA was initially greeted
with disappointment by Europe’s defence industry, which had hoped for a much more ambitious
1166
“The [EDA], which should be subject to the Council’s authority and open to participation by all Member States,
will aim at developing defence capabilities in the field of crisis management, promoting and enhancing European
armaments cooperation, strengthening the European defence industrial and technological base (EDITB) and creating a
competitive European defence equipment market, as well as promoting, in liaison with the Community’s research
activities where appropriate, research aimed at leadership in strategic technologies for future defence and security
capabilities, thereby strengthening Europe’s industrial potential in this domain.” European Council (2004)
1167
In June 2003, the European Council requested “the appropriate bodies of the Council to undertake the necessary
actions towards creating, in the course of 2004, an intergovernmental agency in the field of defence capabilities
development, research, acquisition, and armaments”. European Council (2003)
1168
Prior to the Lisbon Treaty, “[EU High Representative] Solana [chaired] the Steering Board, the principal decisionmaking
body of the Agency, made up of Defence Ministers from 26 participating Member States (all EU members
except Denmark) and a member of the European Commission. In addition to ministerial meetings at least twice a year,
the Steering Board also meets at the level of national armaments directors, national research directors, national
capability planners and policy directors.” Baroness Ashton, the new EU High Representative for Foreign Affairs and
Security Policy, succeeded Javier Solana as EDA Steering Board chair in December 2009. See EDA’s organisational
chart: http://www.eda.europa.eu/genericitem.aspx?area=Organisation&id=119
1169
IISS (2005) pp. 46-47
1170
EDA background description: http://www.eda.europa.eu/genericitem.aspx?area=Background&id=122
1171
EDA (2005) and EDA Code of Conduct (2005)
1172
The CoC is based on five principles: (1) a voluntary, non-binding approach; (2) fair and equal treatment of suppliers
(a competition process based on objective and transparent selection criteria; specifications and statements of
requirements, preferably defined in terms of function and performance; clear and transparent award criteria; and
debriefings for all unsuccessful bidders); (3) mutual transparency and accountability; (4) mutual support; (5) mutual
benefit. EDA has created a website to post to post defence procurement opportunities with a net contract value of at
least EUR1 million (excluding VAT): http://www.eda.europa.eu/ebbweb/Default.aspx
1173
The CoC exempts “procurement of research and technology; collaborative procurements; and procurements of
nuclear weapons and nuclear propulsion systems, chemical, bacteriological and radiological goods and services, and
cryptographic equipment” from its purview.
1174
TEU = Treaty on European Union
1175
The first key principle of the CoC, enshrining the regime’s “voluntary, non-binding approach”, is defined as
follows: “No legal commitment is involved or implied. The regime will operate on the basis of sovereign Member
States [sMS] voluntarily choosing to align their policies and practices, on a reciprocal basis, in this area. Those who
elect to join the regime, and follow this Code, will be free to cancel their participation in the regime at any time. No
sanction is envisaged for any non-observance of this Code by any sMS, beyond the requirement to account to the other
members of the regime. In all cases, the final authority for contract award remains with sMS national authorities.”
235

EU undertaking. 1176 However, EDA’s first CEO, Nick Witney, strongly defended the agency,
emphasising that Javier Solana is a “strong advocate of this enterprise” and that EDA’s regular
Steering Board meetings allow for “a lot of contact with the highest decision-making levels”. 1177
Witney described OCCAR as EDA’s “complementary sister organisation” 1178 that operates in a
different market section:
“My vision of the future is that we keep OCCAR’s project management pipeline full with
projects we have had a hand in generating. It is perfectly possible [that OCCAR will
become part of EDA], but I don’t think it is going to happen in the three years I will be
here.” 1179
Witney conceded that there were fundamental differences within EDA between those who “believe
in European-preference” and those who “believe equally strongly that ‘Fortress Europe’ would be a
bad idea” 1180 . This on-going debate is particularly relevant for Europe’s defence industrial relations
with America. The EDA deliberately avoided this thorny issue and created “a regime that governs
the conduct of European member states toward each other in matters of defence procurement”. 1181
Speaking in 2005, Witney described as one of his top priorities to boost European defence research
and testing (R&T) budgets, if necessary by moving money over from other budget areas. Apart
from spending more, the EDA CEO specifically urged his members to boost the share of
collaborative R&T defence projects that they undertake beyond the current 5 percent mark, directly
tied to the jointly-defined capabilities needed for the future. 1182 Finally, Witney defined EDA’s
future success or failure as follows:
1176 Witney (2005)
1177 Ibid.
1178 Ibid.
1179 Ibid.
1180 Ibid.
1181 Ibid.
1182 Ibid.
“One of the things that is going to matter – this is a rather informal indicator but it is
hugely important – is to look around those meetings and see if the minister is actually
present. Our ability to succeed or fail depends on our ability to retain interest at the highest
levels. There are also some very specific things: If I can look back in two and a half years
and see cross-border competition in defence procurement in Europe, that in itself would be
a huge step forward. I would like to think there will be at least half a dozen significant
collaborative projects that might not have happened without the Agency’s influence. I would
like to see a significant increase in the amount of money we are spending on defence R&D
236

1183 Ibid.
collectively. And, of course, [we must make] real progress in increasing the pool of
European forces fit and ready for crisis-management operations.” 1183
237

6.3 The US reaction to ESDP: “Yes, but…”
The EU’s unprecedented momentum at the political-military level since the St. Malo, Cologne, and
Helsinki Summits hardly looked reassuring for Washington and raised serious questions about
ESDP’s ultimate impact in terms of duplicating Alliance assets, fostering the creation of an EU
caucus in NATO, etc. 1184 After it had become obvious that Secretary Albright’s harsh “Three Ds”
response towards ESDP had failed to rein in the EU’s defence effort, her deputy used the NATO
Ministerial in mid-December 1999 to express the US thinking about ESDP in more positive terms.
Adopting language first publicly employed by the new British NATO Secretary-General Lord
Robertson a month earlier, Talbott stressed that ESDI / [ESDP] 1185 should rather be based on the
“Three Is” principles: “improvement in European defence capabilities; inclusiveness and
transparency for all Allies; and the indivisibility of [transatlantic] security, based on our shared
values” 1186 . Washington insiders viewed the State Department as most sceptical / hostile towards
ESDP, while the NSC tended to be more EU-friendly. 1187 At the Pentagon, interestingly, there was
a clear disconnect between the civilian and military leadership. The former adopted an “alert-but-
relaxed” approach characterised by “attempting to downplay the negative [US] reactions to ESDP
while emphasising how important it is for the European allies to produce real military
capabilities” 1188 . The Joint Chiefs, in contrast, seemed to harbour “apparently residual suspicion of
the whole [ESDP] operation and of French motivations behind it” 1189 .
While the Clinton administration changed its official rhetoric in mid-December 1999 and appeared
to view ESDP in less confrontational terms, a majority of Democrats and Republicans in Congress
remained concerned about ESDI / ESDP. Two Congressional resolutions as well as individual
member statements and committee hearings reflected that sentiment. The first resolution, passed by
the House on 2 November 1999 by a 278-133 margin, made a strong commitment to NATO and
supported ESDI on the condition that it resulted in more European capabilities and transatlantic
burden-sharing. 1190 At the same time, the measure also expressed concerns about ESDI / ESDP
1184
Kupchan (2000) pp. 18-21
1185
“Already there is an initial strategic disconnect indicated by the American reactions. Most American commentators
refer to ESDI as their source of concern when they should be talking about ESDP. ESDI did not give rise to much alarm
in the [US] because it was defined fully within the framework of the Alliance. ESDP, defined as autonomous from
NATO and within the EU framework, is what most US commentators find alarming even if they refer to it as ‘ESDI’.”
Sloan (2000) p. 23
1186
Robertson (1999)
1187
Sloan (2000) p. 25
1188
Ibid., p. 25
1189
Ibid., p. 26
1190
The burden-sharing argument was particularly appealing to the Republicans’ small-government-and-lower-taxes
fiscal hawks in charge of the House at the time.
238

using the “Three Ds” language. 1191 On 8 November 1999, the Senate passed a similar NATO-ESDP
resolution introduced by Republican William Roth, Jr. and backed by influential Senators Helms,
Lugar, Biden, Kyl, Hagel, Lieberman, etc. The resolution called on the EU to (1) “undertake an
autonomous mission through [ESDI] only after [NATO] had declined to undertake that mission”
when “matters of transatlantic concern” were at stake; and (2) not to implement the Cologne
Summit decisions in a way that “promote[s] a strategic perspective on transatlantic security issues
that conflicts with that promoted by [NATO]” 1192 1193 1194
.
Hearings held by the House International Relations Committee also exposed deep-seated US
reservations about ESDP among neoconservatives like John Bolton, who warned Congress that on-
going efforts by EU members to align their “foreign and defence policies […] into one shared and
uniform policy is at times motivated either by a desire to distance themselves from US influence, or
in some cases by openly anti-American intentions” 1195 . Ultimately, ESDP could spell “the end of
NATO as we know it as a military organisation, a fragmentation of transatlantic political
cooperation, and could quite possibly spill over into harmful economic conflict as well”. 1196
Bolton’s testimony was echoed by Peter Rodman, who charged that the Europeans, “rather than
joyfully falling in step behind our global leadership […] are looking for ways to counter our
predominance”. 1197 Kim Holmes from the conservative Heritage Foundation warned that
“hamstringing and weakening US global leadership by insisting on UN mandates for every overseas
military operation or other multilateral action could undermine the will of the [US] to lead” 1198 . As
William Wallace and Jan Zielonka observed:
“Eurobashing is back in fashion in the [US].” […]
“Just as European anti-Americanism damaged Western solidarity during the Cold War, so
American Eurobashing threatens to unravel transatlantic cooperation in the post-Cold War
era. If the [US] expects Europe to shoulder a larger burden of global leadership, a decent
1191 Conservatives opposed to the resolution criticised that America was subsidising security for its rich European allies
through NATO and therefore questioned the fundamental utility of NATO as an instrument of US foreign policy in the
post-Cold War era. Liberal Congressmen voted against the resolution for fear that NATO expansion could antagonise
Russia or that the US President could use the Alliance as a vehicle to weaken / circumvent the constraints imposed by
the 1973 War Powers Act. Sloan (2000) pp. 29-30
1192 Senate (1998)
1193 This resolution was “softer” than the initial version introduced by Senator Roth, in which he had used very
controversial language such as that Washington would “assign” to Europe those military and security tasks where the
US did not want to get involved. Sloan (2000) p. 31
1194 At their Helsinki Summit in December 1999, EU leaders refused to give NATO a droit de regard over future ESDP
operations.
1195 Bolton (1999)
1196 Ibid.
1197 Rodman (1999)
1198 Holmes (1998)
239

espect for Europe’s opinions is in the American interest. The current approach, combining
demands for greater burden-sharing with knee-jerk dismissals of European policies, risks
alienating America’s most important allies.” 1199
Beginning in 1997-1998, against the backdrop of rising transatlantic tensions, key EU leaders
embraced a political rhetoric that was increasingly critical of America and talked openly about the
need to balance against the US hegemon. 1200 One should not forget though that former senior
Clinton officials like Bob Hunter, NATO Ambassador during 1993-1998, and NSC Europe Director
Ivo Daalder, now President Obama’s NATO Ambassador, held a much more benign view of ESDP.
At the same House hearing, Hunter affirmed that “a functioning [ESDI] […] will indeed promote
our interests in Europe [and] strengthen the bonds of alliance” 1201 by providing for more equitable
burden-sharing. And as Daalder, now President Obama’s NATO Ambassador, stated: “Europe’s
problem today is not its potential future strength. On the contrary, it is Europe’s actual political and
military weakness [that is the problem].” 1202 Similarly, Kupchan argued that “French rhetoric
notwithstanding, the EU is anything but an instrument for amassing or projecting power. […] The
EU is fundamentally about binding and pooling power, not projecting it. In that sense, the realistic
risk is still of too little Europe, not too much of it.” 1203
Extremely critical or very positive assessments of ESDP by US politicians and defence analysts
across the political spectrum notwithstanding, the Clinton administration ultimately adopted an
approach towards ESDP that Stanley Sloan dubbed the “‘Yes, but…’ policy, supporting the
European effort but warning of its potential negative consequences”. 1204 1205 1206 However, the deep-
seated distrust, hostility, and protectionist mindset displayed by the Republican-dominated
Congress (and some Democrats) vis-à-vis France and ESDP further constrained the Clinton
1199
(Wallace & Zielonka, 1998) pp. 65 ; 68
1200
On 3 December 1999, Chris Patten, EU Commissioner for External Relations, stated that it was the objective of
ESDP “to make sure the European voice is heard at the same strong decibel level as when the [EU] speaks as the
world’s biggest trade bloc and the biggest foreign aid donor.” On 28 December 1999, Chancellor Schroeder said that
Washington “lacked consideration for its allies” [and that] [w]hining about US dominance doesn’t help. We have to
act.” In June 2001, Swedish Prime Minister Persson remarked that the EU “is one of the few institutions we can
develop as a balance to US world domination”. Mowle (2004) p. 131
1201
Hunter (1999)
1202
Daalder (1999)
1203
Kupchan (2000) p. 23
1204
Sloan (2000) p. viii
1205
“[The American ‘yes, but…’ attitude is one] in which there nearly always coexist the sacrosanct nature of NATO, a
large dose of historical suspicion of France, a deep-seated aversion to the very term European ‘autonomy’ and a certain
uneasiness – which is new – regarding recent British and German policies.” Gnesotto (April 2000) p. vi
1206
“After 1945, the American prescription for Europe was to make it ‘more like us’: to build a United States of Europe
that would become America's loyal partner within a broader Western alliance. In the years since, American
disappointment at Europe’s unwillingness to accept US leadership unconditionally has fluctuated between despair over
European political incoherence and fear that the European allies might agree on a framework for integration different
from what Washington had prescribed.” (Wallace & Zielonka, 1998) pp. 65-66
240

administration’s freedom of movement and made it impossible to envision any transatlantic A&D
industry “merger of equals”.
241

6.4 Growing US unilateralism and the rise of transatlantic political clashes
The launch of ESDI / ESDP and the creation of EADS in the 1990s coincided with growing
transatlantic tensions in a number of areas, ranging from arms control, the environment, trade policy
/ sanctions to human rights and military cooperation. Thomas Mowle captured the essence of the
emerging “transatlantic rift” debate: “Why, despite their professed similarity of goals, do the policy
preferences of the [EU] and the [US] diverge on so many multilateral issues?” 1207 Mowle analyses
four major EU-US clashes in four distinct issue areas where America and Europe had clear political
differences during the December 1997-December 1998 timeframe: Mine Ban Treaty (MBT); Kyoto
Protocol; International Criminal Court (ICC), and St. Malo. The first three of these transatlantic
clashes were triggered by Washington’s opposition to the establishment or strengthening of
multilateral institutions. 1208 As the world’s last superpower, America was particularly sensitive to
any (perceived) attempt by other countries – including its allies in Europe – to leverage multilateral
institutions to restrain US capabilities or freedom of action. From Europe’s perspective, the clear
shift in mood within US policy-makers in the 1990s against acceptance of international law and
multilateral institutions – evidenced by the conservative Republican take-over of Congress in 1994
– made Washington increasingly appear as an arrogant, unilateral, and trigger-happy superpower.
The subsequent change to the George W. Bush administration, the impact of 9/11, and the 2003 Iraq
War led to a dramatic deterioration in US relations with key European allies like France and
Germany.
The transatlantic clash over MBT 1209 was significant because “for the first time since its rise to
superpower status at the beginning of the Cold War, the [US] made non-negotiable demands at an
international security conference – and saw its demands set aside.” 1210 In June 1997, after four years
of high-profile NGO lobbying efforts, more than 90 countries – including virtually all EU members
– declared their unconditional support for a complete landmine ban world-wide. Washington, in
contrast, pushed for five treaty changes (three of which were deemed “non-negotiable”), including
an exemption for the heavily fortified DMZ 1211 on the Korean Peninsula. 1212 When all these
demands were rejected by a two-third majority vote, Washington pulled out of the MBT conference
in September 1997. The following month, the ICBL 1213 was awarded the Nobel Peace Prize, a
1207
Mowle (2004) p. 1
1208
Ibid., p. 26
1209
The MBT was signed in December 1997 and entered into force in March 1999.
1210
Mowle (2004) p. 12
1211
DMZ = Demilitarised Zone
1212
Mowle claims that Washington’s opposition to the MBT “merely derived from the official position of the DoD,
which did not represent a monopoly opinion within the security community”. Mowle (2004) p. 72
1213
ICBL = International Campaign to Ban Landmines
242

decision that made America – especially among European publics – look even more like an
arrogant, unilateralist superpower that throws its weight around and refuses to be bound by
international regimes and institutions.
The second transatlantic political clash was triggered by the Kyoto Protocol signed in December
1997. For Republican and Democratic opponents of Kyoto, the main problem was that key
developing countries – in particular rapidly-growing major CO2 emitters like China and India –
were exempt from any binding emission reduction targets. 1214 While Washington was able to
extract some concessions 1215 during the Kyoto negotiations, these changes did not satisfy the
Senate, which had specifically insisted on the inclusion of countries like China and India in the
Kyoto regime. While President Clinton signed the Kyoto Protocol in November 1998, he never
submitted it to the Senate for ratification. 1216 The long-time refusal by prominent, mainly
Republican US policymakers to accept the notion that man-made climate change is for real further
fostered the impression that America and Europe did no longer share the same value system. As the
globe’s largest CO2 emitter, the US was seen by the rest of the world, and Europeans in particular,
as the biggest and most intractable problem in the global climate change equation. After the end of
the Cold War, Europeans began to rank environmental challenges such as climate change among
their top global security concerns. It is therefore no surprise that Washington’s opposition to Kyoto
created the perception of a “transatlantic rift”, especially when measured in terms of America’s
poor image and reputation abroad. Over the past decade, Washington’s steadfast rejection of
legally-binding international CO2 emission reductions has widely been viewed as one of the most
1217 1218
egregious symbols of American arrogance and unilateralism.
The third transatlantic clash was triggered by the Rome Statute establishing the ICC, which opened
for signature in the Italian capital in July 1998. Here again, the underlying source of (transatlantic)
conflict was the extent to which the American hegemon would allow itself to be bound by
multilateral rules and institutions. In particular, the controversy erupted over whether US military
1214
In 1997, the Senate voted 95-0 for resolution S. 98 calling on President Clinton not to sign the Kyoto Protocol
unless it contained “specific scheduled commitments to limit or reduce greenhouse gas emissions for Developing
Country Parties within the same compliance period”.
1215
These concessions concerned the way CO2 emission targets were calculated or how the relevant reduction
timetables were to be structured. Mowle (2004) pp. 73-74
1216
In March 2001, President Bush made it clear that the US would not ratify the Kyoto Protocol as it would seriously
harm US economic growth and destroy American jobs.
1217
Virtually all major European countries – with the exception of Germany – were themselves lagging behind their
Kyoto commitments.
243

personnel and government official serving abroad should be subject to the ICC’s jurisdiction, which
includes genocide, war crimes, crimes against humanity, and aggression. Washington, fearing that
politically motivated ICC charges could be brought against its troops, lobbied hard to weaken the
Court’s reach. 1219 1220 In the end, the US was left isolated as all other EU / NATO members, backed
by many African and Latin American countries as well as Russia, India, Japan, etc. supported the
ICC despite US objections. 1221 President Clinton signed the Rome Statute on 31 December 2000,
the last possible day, to ensure that Washington could “influence the evolution of the court”. 1222
When it became obvious that the ICC was on track to enter into force, the new Bush administration
tried aggressively to secure bilateral non-surrender “Article 98” waiver agreements with ICC
members to exempt US soldiers and officials from the Court’s jurisdiction, using economic and
military aid as well as the provision or withholding of political support as carrots and sticks in the
negotiating process. 1223 Washington’s push for “Article 98” agreements created serious tensions
with the Europeans, who once again seemed to be on the receiving end of an arrogant, unilateral
American superpower that was not willing to play by the rules and worked “against the object and
purpose of the statute”. 1224
When discussing US unilateralism vis-à-vis Europe in the 1990s, one also needs to mention the
transatlantic trade disputes during that period: bananas, hormone beef, GMOs, the Iran-Libya
Sanction Act (ILSA), and the Helms-Burton Act. 1225 While these trade disputes created
considerable resentment on both sides of the Atlantic (particularly in Europe), it is fair to say that
“[transatlantic] disputes over trade are not very puzzling: the [US] and the [EU] compete in trade,
1218
US President Obama has promised to fight climate change through the introduction of a cap-and-trade system and a
strong push for energy conservation / renewable energy. However, given the economic costs involved, the cap-andtrade
measure is highly controversial among Republicans and Democrats in Congress.
1219
The Clinton administration tried to give the P5 UNSC members veto powers over future ICC prosecutions. Paris did
support Washington on some counts during the ICC negotiations, including the possibility to grant ICC members the
right to opt out of crimes other than genocide. Mowle (2004) p. 91
1220
Interestingly, the ICC was also opposed by Democrats like Senator Feinstein (D-CA), who feared that an ICC
provision prohibiting “the transfer, directly or indirectly, by the Occupying Power of parts of its own civilian population
into the territory it occupies” could be potentially used against the Israeli government and its citizens. Ibid., p. 90
1221
The following seven countries are believed to have rejected the Rome Statute: America, China, Iraq, Israel, Libya,
Qatar and Yemen. Ibid. p. 91
1222
President Clinton emphasised that the Rome Statute had “significant flaws” and that he did “not recommend that
my successor submit the Treaty to the Senate for advice and consent until our fundamental concerns are satisfied”.
Statement by the President on the Signature of the [ICC] Treaty, 31 December 2000, quoted in Ibid., p. 91
1223
The American Service-Members’ Protection Act, passed by Congress in August 2002, was designed “to protect
[US] military personnel and other elected and appointed officials of the [US] government against criminal prosecution
by an international criminal court to which the United States is not party”.
1224
Dempsey (2002) quoted in Mowle (2004) p. 8. According to the 1969 Vienna Convention on the Law of Treaties, a
signatory state to an international treaty that has not yet ratified the agreement must not act in ways that undermine the
“object and purpose” of the treaty. A signatory can therefore decide to “un-sign” the treaty to be free from that
restriction. Mowle (2004) pp. 90-91
1225
The “Cuban Liberty and Democratic Solidarity (Libertad) Act” is commonly referred to as the Helms-Burton Act,
named after its two original sponsors, Senator Helms (R-NC) and Congressman Burton (R-IN).
244

so one expects to find conflict” 1226 . That being said, transatlantic conflicts over unilateral, extra-
territorial US trade sanctions targeted at Iran and Cuba are clearly more political in nature than
“normal” market-access trade disputes over tariffs or quotas. The ILSA and Helms-Burton Act
clashes reflect not only very different US-EU views regarding the constraints imposed by
international laws and institutions on the exercise of American power; they are also indicative of
diverging geopolitical threat perceptions as well as different transatlantic capabilities and
preferences along the “engagement vs. confrontation” policy toolbox spectrum.
1226 Mowle (2004) p. 14
245

Chapter 7: Action and reaction: the BMD vs. the EADS merger
7.1. Ethnocentric vs. regiocentric aerospace and defence consolidation
The BMD merger, like virtually all the other major elements of the American A&D industry
structure, was driven by what Keith Hayward has termed an ethnocentric approach: one that regards
the retention of American control and ownership over Boeing and MDC as paramount due to
relevant national security considerations. The Clinton administration’s mercantilist agenda –
defined as the attempt “to assure that the aeronautical capabilities (technological, industrial, and
commercial) of the respective countries are nurtured and protected and given every advantage over
their rivals” 1227 – also played a role in shaping US A&D industrial policy. In comparison, the EADS
merger involving three European “national champions” conformed to the model of a regiocentric
company “blending strategic interests with regional integration / national sensitivity”. Hayward
coined these terms during the crucial 1997 / 1998 period: after the BMD merger but before the
creation of EADS. At the time, he was only beginning to see the contours of Europe’s future
industry consolidation process. Hayward identified Eurocopter and Airbus Integrated Company
(AIC) as existing or potential examples of regiocentric firms in Europe. 1228 Subsequently, EADS
would become the example par excellence of a region-centric company, both in Europe and the rest
of the world.
Despite the pressures of globalisation and the progress towards more open international trade and
investment regimes that could be observed during the 1990s, governments on both sides of the
Atlantic remained heavily involved in “their” respective A&D industries; be it as customers,
shapers of industrial policy and R&D aid providers, regulators, political / executive-level backers
for export sales, or owners and shareholders. While the founding of EADS certainly marked a
historic milestone in the (transnational) integration of the European A&D industry, one must not
forget that the governments of France, Germany and Spain continued to be the ultimately decisive
factors weighing on EADS’ internal structure and overall strategic orientation. In particular, France
and Spain made sure to retain significant direct and indirect state-controlled EADS shareholdings,
thus adding further economic weight to their already considerable political influence. 1229 In 2007,
for example, when EADS embarked on a major internal restructuring programme dubbed
“Power8”, all the key elements of this highly controversial cost-cutting package involving plant
closures, thousands of job losses, and a top-level management shake-up were ultimately decided by
the three governments concerned, primarily Germany and France. In 2007, then-French presidential
1227 Thornton (1999) p. 72
1228 Ibid., p. 9
1229 It is fair to say that the French and Spanish governments are explicitly mercantilist. The German government, in
contrast, is rhetorically liberal market, but in practice has mercantilist instincts in strategic industries.
246

candidate Nicolas Sarkozy even made the EADS restructuring plan part of his rather populist
campaign platform, declaring boldly that “If I’m elected President of the Republic, I’ll renegotiate
with the Germans.” 1230
In the US, in contrast, direct state holdings in the American A&D industry are virtually unheard of.
However, there is a web of long-standing relationships linking the executive branch (notably the
Pentagon, but also the White House) and Congress (Senators and Congressmen care a lot about jobs
in their districts) to the country’s major A&D companies. Sometimes relations are even too close,
as evidenced by various high-profile procurement corruption scandals. In 2003, for example, senior
Boeing and USAF officials attempted to secure an improper multi-billion dollar Pentagon deal to
lease and buy 100 KC-767 Boeing aerial refuelling tankers to the detriment of US taxpayers and,
indirectly, its European rival Airbus. Cases of outright corruption left aside, US national security
concerns as well as parochial, often mercantilist-inspired thinking in Congress – which is an
integral element of the “iron triangle” connecting the legislative branch, the government
bureaucracy, and outside interest groups / business players as part of the military-industrial complex
– have been the key obstacles to full-fledged transatlantic A&D industrial integration at the prime
contractor level. Another important factor has been Washington’s “revolving door” tradition
allowing senior government officials (primarily political appointees) to move to A&D companies
and then back into the public sector. 1231
For sure, similar parochial motivations can be found on the other side of the Atlantic as well.
However, apart from Gaullist France, the other major European A&D companies and the
governments behind them have, in principle, shared a strong interest in entering into (roughly
balanced) mergers with suitable American counterparts; primarily to gain access to the vast US
military procurement business, to leverage state-of-the art US technologies, and to better tap into
America’s deep capital markets. At least in the defence sector, European aerospace companies have
been the underdogs since 1945. This state of affairs explains why British and German firms in
particular were so eager to “marry up” and join forces with suitable US partners in the 1990s
provided that there would be “merger of equals”. Conversely, in the commercial aerospace sector,
Airbus had effectively used the last few decades to establish itself as a formidable force in the
1230 Gartzke (2007)
1231 Current US Deputy Defense Secretary William J. Lynn III, who took office on 12 February 2009, previously served
as senior vice president of government operations and strategy at Raytheon during 2002-2009. Prior to that, he worked
as executive vice president of management consulting firm DFI International. In the second Clinton administration,
William Lynn served as Under Secretary of Defense (Comptroller) during 1997-2001. Lynn’s appointment was very
controversial because President Obama had to waive his administration’s new ethic rules that impose a two-year
waiting period between registered lobbying activities and working for the administration on the same issues.
247

global market for large-scale aircraft, driving Lockheed and MDC out of the civil aviation business,
and successfully breaking Boeing’s long-standing market hegemony.
Writing during the crucial 1997-1998 period, Keith Hayward commented about the impact of
globalisation on the traditionally close ties between national governments and their respective A&D
industries:
“[…] [E]thnocentricity remains the most powerful force determining [A&D] industrial
development and […] any assumption of reduced state intervention would be somewhat
heroic.”
“[T]he links between aerospace and the nation-state remain strong and definite. There has
been change [due to globalisation], but not fundamental change. One might even assert a
more ambitious argument, that while the nation state remains the pre-eminent actor in
international relations with all of the security overtones that implies, such a de-coupling
will be impossible.” 1232
Apart from political / national security realism one can also point to mercantilism as a powerful
force behind the continuing strong links between nation states and their respective A&D industries.
As the economic variant of realism, mercantilism can also serve as an effective analytical bridge
connecting the military and the civilian side of the aerospace business. The two industry areas are
crucially important for virtually all governments concerned; both from a strategic / national security
perspective and in terms of the aerospace sector’s economic-technological weight, its ability to
generate crucial export earnings, secure cutting-edge jobs, etc. For these reasons, governments care
about how their country’s military and civilian aerospace companies are doing, especially relative
to foreign competitors. For example, Boeing’s economic importance is highlighted by the fact that
the company has long been ranked as America’s single biggest exporter. 1233 At the same time,
Airbus and the EC have accused the US government of effectively subsidising Boeing’s
commercial aircraft operations through the Pentagon’s huge military aircraft procurement and
defence R&D programmes. 1234
Furthermore, top US and European political leaders have repeatedly engaged in competitive,
aggressive lobbying efforts vis-à-vis third-country governments to make sure that “their” aerospace
1232 Hayward (1999) pp. 13-14
1233 Boeing (2007)
1234 “[W]hile the spin-off from military to civilian applications may not be as strong in the past, the American defence
budget will continue to be the world’s most significant industrial policy for many dual-use technologies.” Moran (1993)
p. 213
248

companies win crucial multi-billion civil and / or military aircraft orders. “Civil aeronautics exports
have been closely linked to security issues and on occasion have arisen on the back of defence
sales”. 1235 Countries from around the world (Europe, Middle East, Asia, Latin America, etc.) have
repeatedly leveraged commercial and military aircraft orders as an effective way to curry favour
with the United States or relevant Airbus / European governments concerned and to obtain their
political and sometimes even (tacit) military backing on issues of mutual concern. As the world’s
sole superpower – and to the envy of Europe’s Airbus backers – America was in the position “to
offer a unique package of security-for-trade deals with overseas customers”. 1236 During the 1990s,
the Clinton administration was particularly bent on pursuing neo-mercantilist strategies in the
aerospace industry to counter the Europeans:
“[T]he more overt mercantilist policy of the Clinton era is related precisely to the
competitive challenge mounted by Europe in civil aeronautics in the last 20 years and the
high levels of unemployment experienced in the US industry after the end of the Cold
1237 1238
War.”
Looking at the big-picture relations between the US and European civil aerospace industries since
WWII, one can identify a pattern of government-sponsored actions and reactions on both sides of
the Atlantic which were inspired by national security as well as neo-mercantilist considerations. In
each instance, the respective governments’ interventions were driven by the perceived need to shore
up the (declining) fortunes of their national aerospace companies and / or to foster the creation of
“national champions”. As one analyst put it succinctly: “The aeronautics industry in 1970,
including both the military and commercial side of the business, embodied and powerfully
reinforced American political and economic hegemony in the Cold War era.” 1239
1235 Lawrence (1999) p. 28
1236 Braddon (1999) p. 87
1237 Lawrence (1999) p. 28
1238 The Clinton administration paid particular attention to the A&D industry because of the significant impact of “big
ticket” commercial and military aircraft sales on the US trade balance.
1239 Thornton (1999) p. 72
249

7.2 Safeguarding Europe’s aerospace and defence industrial base vis-à-vis the United States
The launch of the Airbus consortium in the late 1960s was Europe’s successful response to the
crushing American dominance of the world’s commercial airliner market at the time. France, in
particular, played a crucial role in Airbus, mainly because the “[French] political elite had a
coherent and integrated framework for industrial policy and a matching foreign policy”. 1240 The
French were determined to play the lead in Airbus from the start, relying on the DGA to coordinate
government policy on this from the highest level. 1241 The British, in contrast, “had neither [policy]”;
in essence, they were caught in the middle, “facing simultaneously across the Channel and the
Atlantic” 1242 :
“Airbus did emerge and prosper, but in the early days this was despite rather than because
of any British contribution. Not surprisingly, dominance on the first Airbus project went to
the French, ‘[…] consistent French support for and commitment to a truly European
response to the American challenge in civil aerospace was translated into project
leadership on the A300B’. 1243 As a result, Toulouse became the emotional as well as the
physical home of the European aircraft industry.” 1244
The dilemma confronted by the British aerospace industry – that is, the (perceived) need of having
to choose between closer industrial cooperation with mainland Europe or with America – also
became apparent during the events preceding the EADS merger in the 1990s. In December 1998 /
January 1999, BAe decided that it was more important to acquire GEC-Marconi to become the
UK’s undisputed national champion and gain privileged access to the lucrative US defence market
than to join forces with Germany’s DASA and build the first European A&D champion. As a result
of its decidedly Atlanticist strategic outlook, BAE subsequently did not join EADS. BAE’s decision
in October 2006 to sell its 20 percent stake in Airbus to EADS was further proof of its orientation
away from mainland Europe and towards the US (defence) market. It is important to emphasise that
BAe pursued the GEC-Marconi merger and sold its Airbus stake against the express wishes of the
Blair government – something completely unthinkable in France’s state-dominated A&D industry.
Despite some launch hiccups, Airbus took off commercially and rapidly gained market share at the
expense of its US competitors MDC and Lockheed, which was forced to abandon the commercial
1240 Lawrence (1999) p. 37
1241 For additional information on the DGA and its important role in French armaments policy, see Chapter 1.3 of this
thesis.
1242 Lawrence (1999) p. 37
1243 Thornton (1995) quoted in Lawrence (1999) p. 37
1244 Lawrence (1999) p. 37
250

aircraft business in the early 1980s. “[Arguably the most important development in commercial
aeronautics during the 1970s and 1980s was the re-emergence of a European capability in large
airframe manufacturing in the form of Airbus Industrie”. 1245 By the late 1980s / early 1990s, it was
clear that Airbus had “thoroughly and permanently altered the very structure of the [aerospace]
industry”: 1246
“Even as Boeing remains the market leader and is the single most significant force in the
industry, American hegemony in the civil airliner market has been […] thoroughly
challenged if not broken decisively.” 1247
It is interesting to note that Airbus’s successful assault on Boeing’s hegemonic position in the
commercial aircraft business coincided with America’s rise to sole superpower status after the end
of the Cold War. In this context, one must not forget that America’s macroeconomic situation also
improved dramatically beginning in 1992-1993, allowing newly elected President Clinton to take
credit for stronger economic growth, record low unemployment, a shrinking budget deficit, low
interest rates, and a booming stock market fuelled by the nascent Internet economy.
“[The Clinton administrations] […] most assuredly deserve recognition for their
determined and concerted efforts to marry these developments in the realms of security and
economics [that is, America’s rise to sole superpower status and the resurgent US economy]
into a coherent, ‘geo-economic’ strategy designed to extend US commercial and political
influence abroad.” 1248
Against the backdrop of Washington’s geoeconomic strategy, Thornton also emphasised that the
“on-going consolidation [in A&D] is occurring in a technological and industrial context in which
the lines between the civilian and military sectors are becoming increasingly blurred”. 1249 This
growing linkage between the commercial and the military side of the aerospace business is crucially
important, since it made the fate of MDC and Boeing an even bigger matter of concern for the US
government and Members of Congress.
At various points in the 1990s, America like Europe had the perception that their aerospace
industries were under serious competitive attack from the other side, threatening to cause a decline
over the long-term. For the US, that threat concerned primarily Airbus’s surge in the commercial
1245 Thornton (1999) p. 73
1246 Ibid., p. 75
1247 Ibid., p. 75
1248 Ibid., p. 77
1249 Ibid., p. 77
251

aerospace business. According to an Airbus executive, “The commercial success of Airbus has
infuriated the Americans who consider the domination of the LCA [Large Commercial Aircraft]
market by US industry is the normal state of the world”. 1250 On the military front, in contrast, US
defence contractors (especially after their successive rounds of consolidation), enjoyed not only a
commanding lead over their European competitors in terms of size and technology, but also
successfully leveraged Washington’s position as the world’s hegemon to launch successful export
offensives in Eastern Europe and elsewhere. America, after all, had no (military) peer competitor.
In FY1996-1997, the US defence budget amounted to US$270 billion. In contrast, the combined
defence budgets of six major EU military powers 1251 only totalled US$120 billion during that same
period. Furthermore, given the highly fragmented state of the European A&D industry, senior
executives from these companies repeatedly lamented the fact that “[i]n Europe we are trying to
support three times the number of contractors on less than half the budget” 1252 compared to the
Americans.
While US mega-primes like Boeing, LMC, and NGC clearly dominated the defence business, the
stunning success of Airbus on the global civil aviation market was of growing concern to American
executives and policymakers. The importance of spin-on effects from civil to military aerospace
meant that a loss of market share and lagging technological innovation for US companies risked
weakening America’s industrial base and causing national security vulnerabilities. 1253 The rise of
Airbus and the corresponding decline in Boeing’s technological capabilities and sales constituted a
clear threat to US national and geo-economic security.
“[US] attention has been focused on the idea of national ‘competitiveness’ and on the
persistent US trade and current account imbalances which are seen as leading to the
accumulation of external debt and inward foreign investment and ownership (leading to
1254 1255
‘dependence’ on foreigners, especially the Japanese, for ‘strategic’ technologies).”
1250
Bieler (1999) p. 113. Mr. Bieler served as Director of International Affairs at Airbus Industrie.
1251
UK, France, Germany, Italy, Spain, and Sweden
1252
Whitfield (1999) p. 105
1253
In 1997, David Thornton defined the growing civilian-defence linkage as follows: “As military strategy, tactics,
operations, and equipment come to rely more and more heavily on so-called information technologies (IT, especially
data processing and microelectronics), the ‘defence industry is gradually dissolving into civilian high-technology
industries’.” Thornton (1999) p. 77, who quotes van Scherpenberg (1997) p. 103. “In the US, following the end of the
Cold War, the defence industry has gradually dissolved into a range of high technology industries where global
competitiveness is the over-riding goal. As a result, the most promising route to commercial success in the aerospace
industry now resides in the greater integration of civil and defence sectors. New over-arching systems integration skills
and new integrated production technologies allow civil users enhanced access to leading edge defence research and
development while providing the military sector with access to path-breaking civil advances in information technology
and microelectronics to drive forward the trend towards ‘information-based warfare’.” Braddon (1999) pp. 82-83
1254
Cable (1995) p. 309
252

Mercantilists, by definition, are greatly concerned about trade deficits and try to avoid or minimise
them at all costs. 1256 “From a geo-economic point of view, the US external deficit originates in an
uneven playing field for trade. The solution is to be found in forcing open foreign markets (or
restricting imports) so as to balance trade.” 1257 It is easy to see this geo-economic approach at play
when Washington is accusing Airbus of benefiting from illegal European government subsidies.
Mainstream economists, in contrast, would argue that US trade deficits are inevitable as long as the
country consumes more than it produces and needs to rely on imports and capital inflows from
abroad to make up the difference. 1258 Therefore, “Japan-bashing or EC-bashing in trade, or Exon-
Florio regulations for investment can affect the composition of the imbalances, but not their
magnitude.” 1259
“The fact that the greatest threat to US power in the international system is ‘made in the
USA’ should in now way detract from its importance to neorealists. Since 1980 the [US] has
consumed almost US$1.5 trillion more than it produced, while two of the prospective
‘challengers’ alone, the Germans and the Japanese, have accumulated more than US$1
trillion in demands on our assets. Reversing this Paul Kennedy-esque trend would
strengthen US freedom of action (present and future) in comparison to an America
becoming more indebted to or owned by foreigners. It would foster external respect, rather
than creeping contempt.” 1260
European firms, in turn, felt fundamentally threatened by the rapidly consolidating US A&D giants,
especially after the BMD merger, which was perceived as an all-out assault on Airbus and its four
partner nations. In this context, one must not forget that fundamental European concerns about
losing the economic and technology race against America (or Japan for that matter) were nothing
new:
1255 “The popular notion of competitiveness – that, in the words of President Clinton, ‘each nation is like a big
corporation competing in the global marketplace’ – has been widely used to create a sense that the US and Europe are
‘losing’ (to each other, Japan or everyone else) in some kind of knock-out competition. […] [M]any […] publications of
recent vintage leave their readers in little doubt as to what the ‘competitiveness’ debate is all about: an economic
equivalent of the Cold War.” Ibid., p. 310
1256 “In the geo-economic view of the world, a trade deficit is intrinsically undesirable, not merely for its own sake
(imports ‘destroy’ jobs), but because it is balanced by capital inflows – foreign investment or the acquisition of claims
on the US federal government – so that the ‘US becomes dependent imports of goods and money from Japan’ and
‘vulnerable to Japanese threats’.” Ibid., p. 310
1257 Ibid., p. 309
1258 “[T]he mainstream economic interpretation of the US deficit […] is that the external deficit is a mirror image, and
consequence, of the internal imbalance between savings and investments and should be addressed not by trade policy
but by government deficit reduction and, where possible, encouraging private savings.” Ibid., p. 310
1259 Moran (1993) p. 212
1260 Ibid., p. 212
253

“Since the creation of the European Communities in the 1950s, the issue of Europe’s
technological and economic competitiveness in relation to the [US] has been on the
political agenda. Three waves of technology-gap fever can be identified. The first occurred
in the mid-1960s, the second in the early 1980s [this time also vis-à-vis Japan], and the
third during the 1990s.” 1261
The 1997-1999 period between the BMD and EADS mergers is particularly relevant as it promises
valuable insights into the strategic perceptions of European aerospace executives and senior
government officials pondering their next moves. In 1997, Robert Whitfield, strategy and external
affairs director of BAe Airbus, summed up Boeing’s dominant post-BMD merger position in the
civil aircraft business as follows:
“It now has over 70 percent of the world’s civil aircraft market by value. In terms of market
penetration, 84 percent of fleets of aircraft are Boeing’s, including military conversions, a
total 87 percent share of all jet aircraft with civil origins are Boeing – and in terms of seats
1262 1263
the figure is around 93 percent. The statistics here speak for themselves.”
To counter Boeing’s dominance, Whitfield strongly urged his fellow Europeans to get their act
together, notably by transforming Airbus into a single company: “in our view, it is the way forward
and the first step to the ultimate goal of total [A&D] consolidation within Europe. […] [Airbus]
SCE 1264 will create a benchmark company forming a bridge for the rest of the industry to
follow.” 1265 1266 Whitfield also laid out Europe’s two existing strategic options in rather blunt terms:
“Governments will face a choice, either to relinquish some control or watch their defence industries
1261 Moerth (2003) p. 60. With regard to the “three waves of technology-gap fever”, the author also references
Sandholtz (1992). The EU’s 2000 Lisbon Agenda can be seen as another European attempt to formulate a coordinated
strategic response to the new economic and technological challenges posed by the US and, increasingly, China as well
as the Asia-Pacific region. At its European Council meeting in Lisbon in March 2000, the EU leaders agreed on a “new
strategic goal for the next decade: to become the most competitive and dynamic knowledge-based economy in the
world capable of sustainable economic growth with more and better jobs and greater social cohesion.” European
Council (2000)
1261 Moerth (2003) p. 60
1262 Whitfield (1999) p. 107
1263 “Despite a 30 percent market share, Airbus still only has 13 percent of the fleet of civil airliners flying and less than
10 percent of the seats, making it effectively a market entrant still for decades to come. The recently approved [BMD
merger] illustrates the competitive threat: [1] Airbus has half the throughput to recover its costs against; [2] it also has
more investments to make than Boeing to extend its product range; [3] aircraft prices are currently 30 [percent] lower
than [five] years ago; [4] Airbus gets far less funding from governments than the US gives its industry and Airbus has
to pay most of it back!” Bruce (1999) pp. 127-128
1264 SCE = Single Corporate Entity
1265 Whitfield (1999) p. 103
1266 The governments of the four Airbus partner countries met in June 1997 to express their support for the January
1997 industry shareholders’ Memorandum of Understanding (MoU) which established concrete dates and deliverable to
transform Airbus into a fully integrated company with the kind of single, streamlined management structure necessary
to compete effectively with arch rival Boeing.
254

slowly wither and die in the face of superior US competition.” 1267 Looking back at the launch of
Airbus in the late 1960s and early 1970s, this common European approach worked extremely well
in the large-scale commercial aircraft business. Whitfield’s conclusion illustrates the high-stakes
transatlantic rivalry in the A&D industry in the 1990s, both at the bilateral and the global level:
“Now is the time for a strong drive to sort out Europe to ensure we can work with the rest of
the world from a position of strength – both in civil and ultimately in defence markets. If
not, we will be reduced to a niche player with an increasingly limited technology base.
Europe must get its act together to compete with the US and negotiate as equals, not as
junior partners.” 1268
For Michel Bieler, Airbus Industrie’s Director of International Affairs, the ultimate goal of the
BMD merger was obvious:
“[T]here is no doubt that the [BMD] merger is the last concerted and finely engineered
move to create in the wake of defence consolidation, a globally dominant national champion
in the civil aircraft sector. Even if it is at the price of some compromise with antitrust law,
this newly created champion has, in the US view, the muscles needed for restoring US
dominance on the LCA market by marginalising Airbus, the only remaining challenger. The
politicisation by the US administration with threats of a trade war and the personal
intervention of President Clinton against the EC when speaking in opposition to the merger,
is the mere proof of the [US government’s] commitment to get the merger through
according to its strategic views.” 1269
To respond to the American challenge, in Bieler’s assessment, Airbus had no choice but to go on
the offensive and try to increase its global commercial aircraft market share to 50 percent – “the
only long term sustainable position in a duopoly situation with a competitor like the new
Boeing”. 1270 Bieler also recommended that Airbus focus on building the A3XX to attack the
existing B747-400 monopoly in the 400+ passenger segment and to thereby “kill” Boeing’s crucial
cross-subsidisation capabilities. 1271 In contrast, a defensive posture would “inevitably […]
marginalise Airbus sooner or later as a niche player ‘à la Douglas’”. 1272 To be sure, streamlining
Airbus by transforming it from a GIE into a SCE / AIC would be much easier to achieve than
1267 Whitfield (1999) p. 107
1268 Ibid., p. 112
1269 Bieler (1999) p. 115
1270 Ibid., p. 119
1271 Ibid., p. 119
1272 Ibid., p. 119
255

creating a fully integrated European A&D champion: “[A]n Airbus [SCE] can show what is
possible in efficiency, allay some of the fears of losing control by individual nations and act as an
example to facilitate wider European aerospace [and defence] restructuring at the earliest time”. 1273
The potential creation of Airbus Military Company as a subsidiary majority-owned by the four
Airbus partners with the participation of other interested (European) aerospace companies to build
the Future Large Aircraft (FLA) military transport aircraft (later dubbed A400M) was seen as a
crucial step towards “breaking the US monopoly in the military transport business”. 1274 Allowing
Airbus to branch into the military business would therefore also weaken Boeing’s ability to cross-
subsidise its commercial aircraft sales with the proceeds from military transport deals. 1275 Writing
in 1997, the BAe Airbus executive in charge of the FLA programme put it bluntly:
“It is recognised that if we don’t do something to change this [existing US monopoly in the
military transport business] we will be placing ourselves at the mercy of the US in the
future, allowing them to control the market, control prices to Europe, and control
technology.” 1276
A March 1997 research report presented to the EC Directorate-General (DG) for Industrial Affairs
warned sternly of a “real [US] threat to the survival of a European defence industrial base that is
able to provide European forces with state-of-the art equipment”. 1277
“Under these circumstances the big challenge for European defence industrial policy is to
avoid a situation where there are only two policy options left: either to buy less capable but
national or European equipment with security of supply assured but military superiority
undermined, or to buy highly capable US equipment providing military superiority over
potential opponents but with security of supply being dependent on US willingness and
capability to support European forces in specific scenarios. If decision-makers want to
avoid this choice and thus improve the prospects of a globally competitive European
DITB 1278 , European arms and defence industrial cooperation has to be improved
dramatically and quickly.” 1279
1273
Bruce (1999) p. 132
1274
Ian Gray (1999) p. 153. At the time, the US A&D industry enjoyed a near-complete monopoly in military transport
aircraft; only minor players such as Spain’s CASA still competed in the small military transport plane segment.
1275
Ibid., p. 154
1276
Ibid., p. 154
1277
(Rohde, Taylor, & Schmidt, 1997) p. 8, quoted in Moerth (2003) p. 43
1278
DITB = Defence Industrial and Technological Base
1279
(Rohde, Taylor, & Schmidt, 1997) pp 48-49, quoted in Moerth (2003) p. 43
256

Despite these rather dramatic industry assessments, the EU’s 1997 Amsterdam Treaty made only a
brief reference to the issue of armaments policy, stating simply that “the progressive framing of a
common defence policy will be supported, as Member States consider appropriate, by cooperation
between them in the field of armaments”. 1280 At the 1999 Cologne Summit, the issue of European
armaments cooperation figured much more prominently on the agenda:
Specifically, EU members agreed to“[…] undertake sustained efforts to strengthen the
industrial and technological defence base, which we want to be competitive and dynamic.
We are determined to foster the restructuring of the European defence industries among
those States involved. With industry we will therefore work towards closer and more
efficient defence industry collaboration. We will seek further progress in the harmonisation
of military requirements and the planning and procurement of arms, as Member States
consider appropriate.” 1281
In her fascinating study of the EU’s armaments policy (covering primarily the 1990s), Swedish
analyst Ulrike Moerth notes:
[The A&D industry] “has been conceptualised within two different projects of European
integration: the political economy project [“market field”] – developed through the EC –
and the defence and security project [“defence field”] – organised through NATO, the
WEU, and recently through the EU.” 1282
In the market field, the restructuring of the European A&D industry was seen through the prism of
having to safeguard Europe’s economic and technological competitiveness vis-à-vis America.
During the 1990s, the EC was the first European political institution that was gripped by this
transatlantic “technology-gap fever” and that tried to do something about it – both with regard to
defence items as well as civilian / dual-use products and technologies. 1283 In January 1996, the EC
1280 Article 17 (formerly J.7) of the Amsterdam Treaty.
1281 European Council (1999)
1282 See back cover description of Moerth (2003).
1283 Back in the early 1980s, during the “second wave of technology-gap fever”, Europe had launched three different
major European RTD programmes. The first two EC initiatives – dubbed ESPRIT (European Strategic Programme for
Research and Development in Information Technology) and RACE (Research and Development in Advanced
Communications Technologies for Europe) – were initiated by Industry Commissioner Davignon, who worked closely
with the leaders of Europe’s twelve biggest information technology companies in defining and implementing the RTD
programmes. The third initiative, called EUREKA (European Research Coordination Agency), was initiated outside the
EC framework by French President Mitterrand, who saw EUREKA as a first response to Reagan’s proposed spacebased
Strategic Defence Initiative (SDI). Ibid., pp. 62-63. Despite their differing institutional set-ups, all three RTD
programs “responded to the same fears about the status of high technology [in Europe]”. Sandholtz (1992) p. 5 quoted
in Moerth (2003) p. 63
257

issued a communication 1284 aimed at fostering increased civil-defence synergies in the EU’s official
RTD 1285 programmes in an effort to counter America’s perceived assault on Europe’s
competitiveness. The EC proposed to formally integrate dual-use technologies in the EC’s RTD
programmes, a move that would have yielded direct benefits for Europe’s A&D industry. By the
1990s, it was already evident that traditional military-to-commercial spin-off effects were
increasingly being replaced by commercial-to-military spin-on effects. In 1996, the EC also
declared that “It has been estimated that technology areas of potential dual-use account for as much
as one third of the overall Community research budget.” 1286 These increased inter-linkages between
commercial and military technologies were particularly pronounced in the aerospace sector.
However, when the EC formally presented its fifth framework RTD programme in April 1997,
there was no explicit reference to dual-use RTD programmes. In the end, it seemed that some
Commissioners and most EU member states were simply too afraid to open the dual-use items
“Pandora’s Box” by “putting into question the civilian objectives of the [RTD] framework
programme and the traditional framing of civil and defence-related issues”. 1287 At the same time,
however, the maintenance of the status quo also meant that defence companies were still able to
participate in EU-funded RTD initiatives as long as they “compl[ied] with the civilian objectives
and rules of the programmes”. 1288 To sum things up:
“The communication from January 1996 showed the Commission’s ambition to pursue a
more comprehensive industrial policy – an action plan – that included not only Europe’s
civilian industry, but also its defence-related industry. Although the future of the defence
industry had been discussed earlier, the communication was the first comprehensive
document from the Commission on the problems of the European defence industry. This was
a rather bold initiative due to the fact that this sector has been regarded as an area of
exclusive national prerogative. Article 296 (formerly Article 223) in the [TEU] allows
governments to exempt defence firms from EU rules on mergers, monopolies, and
procurement.” 1289
According to the EC, an excessively broad (protectionist) interpretation of Article 296 by EU
member states had resulted in a highly fragmented European DITB. In 1996, the EC declared that
“On an overall industry level the […] trade figures give a strong indication that the European
1284
The 1996 EC communication was also dubbed “Bangemann report”, named after the Commissioner for Internal
Market and Industrial Affairs, Martin Bangemann.
1285
RTD = Research and Technology Development
1286
1996 Bangemann report [(COM (96) 10, 20)] quoted in Moerth (2003) p. 67
1287 Ibid., p. 68
1288 Ibid. p. 68
1289 Ibid., p. 69
258

defence-related industry has experienced a worsening of its competitive position vis-à-vis the US
industry since the 1980s.” 1290 Back in 1990, the EC had already tried “to bring armaments
production and trade fully under the discipline of the common market, which would involve, inter
alia, the removal of [Article] 223”. 1291 By weakening and ultimately removing Article 296
(formerly Article 223), the EC was hoping to create the conditions for a market-based consolidation
process in the European A&D industry. In the end, this initiative failed because of political
resistance from member states.
During 1996-1997, the EC, led by Internal Market and Industrial Affairs Commissioner
Bangemann, became very involved in defence industrial issues. The EC hosted a number of
informal seminars and meetings with representatives from business, think tanks, national
administrators, etc. to discuss how to make the European armaments industry more competitive
(notably vis-à-vis America). In November 1997, the EC presented a two-part communication on
“Implementing [EU] Strategy on Defence-Related Industries”. The report’s first part laid out
proposals for a joint European armaments policy. The second part, dubbed “Draft Action Plan for
the Defence-Related Industry”, outlined concrete short-term and long-term actions that should be
taken to strengthen the European DITB. 1292 The following action items were presented:
“[I]ntra-community transfers, a European company statute, public procurement, RTD,
standardisation, customs duties, the innovation transfer of technology and small and
medium-sized enterprises, competition policy, exports dual-use goods and conventional
armaments, structural funds, indirect taxation and direct taxation, principles for market
access, benchmarking, and enlargement.” 1293
Furthermore, a streamlined, fully integrated European DITB would also require the creation of a
joint European Armaments Agency in charge of coordinating defence cooperation and RTD
initiatives. 1294 In 1995 and 1996, the relevant European industry associations – AECMA 1295 for the
aerospace industry and EDIG 1296 for the defence industry in general – were already beginning to
present their own reform proposals. The urgency to change the status quo in Europe was clearly
palpable at the time:
1290
Bangemann report [(COM (96) 10, 7)] quoted in Ibid., p. 67
1291
(COM (90), 600 final, 5) quoted in Ibid., p. 70
1292
Ibid., pp. 71-72; 96
1293
Ibid., p. 96
1294
The EDA launched by the European Council in July 2004 would subsequently take on that role, with the six-nation
OCCAR organisation serving as a complementary entity. See Chapter 6.2 for more detailed information on both
institutions.
1295
AECMA = Association Européenne des Constructeurs de Matériel Aérospatial
1296 EDIG = European Defence Industrial Group
259

“Only if the current fragmented structure of the industry is superseded by a few large
transnational organisations which are unimpeded by individual policies based on national
borders can the industry remain both competitive and profitable.” 1297
“Europe requires an aerospace industry to support its role in global air transport, to allow
an autonomous foreign policy and defence position, to safeguard its access to space and to
contribute to technologically driven growth.” […] [This means that the preferred way for
the restructuring of the European aerospace industry “is to replace the current loose
cooperative arrangements with transnational company structures which have truly
European dimensions.” 1298
“The major prerequisite to establishing a European Domestic Market will be that the
member governments harmonise their operational requirements to enable common
procurements. Other sensitive and complicated problems [that member governments] will
have to resolve : harmonisation of acquisition procedures, laws and regulations, standards,
security of supply, reciprocity of market access within Europe, work share and industrial
return, and export controls.” 1299
The push for a harmonised European defence export control regime was doomed to failure as it
would have constrained the ability of major EU players like France and the UK to use foreign
military sales as a powerful tool of their foreign and security policy. The creation of a European
company statute (SE – “societa europea”) proved to be another thorny issue that was not resolved
until the EU Nice Summit in December 2000, when EU leaders finally agreed to provide the kind of
legal framework which would allow companies to merge across borders and to transfer their
registered offices from one EU member country to another without any changes in their legal
personalities. 1300
Ultimately, it proved impossible to create the necessary political conditions to allow for a market-
based A&D industrial consolidation process. That was simply never going to happen in this
strategic sector. European governments were not willing to abandon the national sovereignty and
prerogatives enjoyed over their respective A&D companies as enshrined in TEU Article 296. Also,
the 14-point “draft action plan” for defence industrial restructuring presented by the EC in
November 1997 (ranging from public procurement reform to harmonised export policies) was
certainly ambitious to say the least. At the same time, the structural problems in Europe’s DITB
1297 AECMA report (AECMA 1996, 55) is quoted in Moerth (2003) p. 76
1298 AECMA report (AECMA 1996, 23) is quoted in Ibid., p. 76
1299 EDIG report (EDIG 1995, 3, see also 14) is quoted in Ibid., p. 76
1300 Ibid., p. 90, Chapter 4, footnote 17
260

persisted because of “inaction” on many of these crucial issues. “[T]he general image of European
defence and aerospace is one of fragmentation, and one in which the industry needs to be
consolidated in order to compete with American companies.” Moerth summed up the “market field”
activities as follows:
“[T]he Commission has, together with the [A&D] industry, and through special journals
and policy centres such as CEPS 1301 created a political crisis awareness pointing to various
economic, industrial, and technological threats from the [US].” 1302
It is important to point out that the EC’s attempted reinterpretation of TEU Article 296 to achieve a
market-based consolidation and restructuring process would have required certain national security
safeguards (Golden Shares, etc.) to protect Europe’s A&D companies against (hostile) take-over
attempts by US mega-primes. 1303
In the end, however, Europe’s historic, transnational A&D industrial consolidation process during
the late 1990 – embodied by EADS – made the really important and decisive strides outside the
EC’s institutional framework (that is, outside of the “market field” dominant in the “First Pillar”).
After all, the EADS deal ultimately required the political consent and support of all three
governments involved. EADS was not the simple result of a market-based consolidation process
that was allowed to play itself out independent of wider political considerations in the “defence
field”. At the same time, though, the relationship between the “market field” and the “defence field”
was certainly interdependent:
“It is difficult to imagine that complex cross-border mergers between defence industries
would have taken place if there had been no credible political development of a European
defence policy. This being said, it is also quite clear that the industry itself created the
pressure for political initiatives and also that the process toward a strong European defence
industry is driven by market factors and not only by the logic within the defence field.” 1304
The crucial role played by actors and developments in the “defence field” and “market field” can be
analysed from two perspectives. First, the 15 EU member states (led by France, the UK, and
Germany) made a largely concerted EU-wide effort to strengthen the bloc’s nascent autonomous
security and defence policy, especially after the Kosovo War (“Spirit of Cologne”). Second, the
1301 CEPS = Centre for European Policy Studies
1302 Moerth (2003) p. 146
1303 Ibid., p. 83
1304 Ibid., p. 74
261

EU’s leading A&D nations, including France, Germany, the UK, Italy, Spain, and Sweden, took
steps outside of the EU institutional framework to streamline Europe’s DITB. 1305
On 9 December 1997, the leaders of France, Germany, and the UK signed off on a Joint Statement
declaring that their countries “share a vital political and economic interest in an efficient and
globally competitive European A&D electronics industry.” 1306 In particular, they recognized the
“urgent need to restructure the A&D electronics industries”, which “should embrace civil and
military activities […] and should lead to European integration based on balanced partnership”.
Finally, Paris, Berlin, and London requested that their respective A&D companies “present a clear
plan and detailed timetable for this restructuring and integration by 31 March 1998”. 1307 At the
time, the political “grand vision” was still to create one fully integrated European Aerospace and
Defence Company (EADC) 1308 . While DASA, BAe, Aérospatiale, and CASA were able to present a
report on the founding principles of a future EADC by the 31 March 1998 deadline, the document
did not contain the requested “clear plan and detailed timetable” for European defence
restructuring. Ultimately, the industry-government talks “never reached the stage of real
negotiations. They were essentially an exchange of ideas and a general discussion of possible
avenues to explore” 1309 . Besides, there were concerns that the planned restructuring into EADC
would have violated EU competition laws. 1310 With BAe’s take-over of GEC-Marconi announced in
January 1999, the grand EADC vision was finally put to rest.
In retrospect, the United States played a crucial role in shaping European political and economic
actions in both the “defence field” and the “market field” – the very developments that would
ultimately bring about much-needed (cross-border) A&D industrial restructuring / consolidation in
Europe:
“There are similarities between the market and defence fields in the sense that they both
concern the notion of Europe’s need to enhance its capacity in relation to that of the [US].
What is presented in these two fields is the need to create a European actor and to pursue
1305
Just to re-emphasise, the defence industrial / procurement area had been a field “reserved” outside the EC since
1958.
1306
Joint Statement by the President of the Republic and the French Prime Minister, the Chancellor of the Federal
Republic of Germany and the Prime Minister of the United Kingdom, Restructuring of the European Aerospace and
Defence Electronics Industry, 9 December 1997. The Joint Statement was supported by the Heads of Government of the
Republic of Italy and the Kingdom of Spain.
1307
The Joint Statement also invited other European companies / countries to join the initiative and called for “swift
progress” in establishing Airbus SCE. Ibid.
1308
See Chapter 4.2 of this thesis for more information on the EADC discussions.
1309 Schmitt (2000) p. 30
1310 Moerth (2003) p. 81
262

European economic and military strategies. The Other in this identity-seeking and capacity-
building process is clearly the United States.” 1311
The “market field” actors like the EC as well as the relevant A&D companies and industry groups
involved certainly viewed the US as a gathering economic-technological (civilian) threat.
Accordingly, America’s mega-primes were perceived as fierce and threatening competitors, but not
as mortal (military) enemies (even though one could easily get war-like impressions when
following the high-stakes zero-sum dogfight between Boeing and Airbus). The ultimate goal of
Europe’s major A&D groups was to acquire the necessary critical mass through (trans)national
consolidation to allow them to compete with the US giants on an equal footing. In fact, to gain
better access to the lucrative American defence market, European CEOs were quite willing and
interested in potentially entering into full-fledged alliances / mergers-between-equals with suitable
US partners. 1312 However, for such a scenario to play out, the Europeans would first need to
consolidate their own A&D companies, be it through the creation of national champions (like BAE)
or transnational champions (EADS). 1313
The EC and the private sector played an important role in first putting the issue of A&D industrial
competitiveness on Europe’s political agenda. That being said, the EC’s attempt to integrate this
strategic, “high politics” sector into the EU’s supra-national “First Pillar” was doomed to failure as
political leaders in London, Paris, Berlin, etc. strongly resisted such dramatic and revolutionary
reforms. While “market field” actors and developments played a critical role in shaping European
perceptions of the gathering threat posed by the US mega-primes, they alone were not sufficient in
bringing about large-scale (trans)national A&D industrial restructuring in Europe. For that to
happen, the relevant national governments had to be on board; and they felt much more comfortable
dealing with these highly sensitive issues through the EU’s “Second Pillar” (see relevant ESDP
declarations on that subject matter) or on an ad-hoc, informal, outside-of-the-official-EU-
framework “coalition of the willing”-type basis.
“In comparison to how the issue of armaments has been part of the two fields – defence and
market – the empirical evidence shows that the political breakthrough in the EU for the
issues occurred when the EU became involved with defence issues. […] [W]hen the [EU]
1311 Ibid., p. 88
1312 In the late 1990s, the American defence equipment market was far larger than the European, given the beginning
recovery in US defence spending and continuing cutbacks in German, Italian, and other procurement budgets. This was
part of BAE’s rationale for going “transatlantic” – the market was simply much larger there.
1313 European governments were also opposed to EC efforts to weaken or remove Article 296 for fears that US megaprimes
could potentially acquire critical elements of Europe’s DITB, thus fostering an increased economictechnological
dependency on America.
263

governments activated the issue of armaments in the defence field, they codified a political
and industrial process that was already under way in the market field.” 1314
“[At the same time though,] activity within the defence industries in Europe suggests that
the increased industrial collaboration into transnational defence companies has put
pressure on the governments to ‘act’ European instead of national. The only item on the
political agenda seemed to be to help industry cope in a more internationalised and
competitive environment.” 1315
The desire of Europe’s major A&D nations to restructure their respective national corporate players
outside of the EU institutional framework (i.e., to stay clear of the “First Pillar” / “market field”
controlled by the EC) also became evident when France, Germany, the UK, Italy, Spain, and
Sweden signed a Letter of Intent (LoI) in July 1998. The goal of the non-binding LoI was “to
establish a co-operative framework to facilitate the restructuring of European defence industry”,
notably with regard to sensitive issues like security of supply, export provisions, security of
information, research and technology, treatment of technical information, harmonisation of military
requirements, and the legal framework. 1316 The LoI attempted to provide rather specific guidance on
how to handle the various industrial and national security implications connected with the potential
future creation of a Transnational Defence Company (TDC) 1317 in Europe. In what is probably the
LoI’s most revolutionary element, the six nations even agreed to “accept mutual interdependence
and the possibility of abandoning industrial capacity”.
“[The Joint Statement] in December 1997 and the succeeding LoI have been discussed as a
reaction toward the demands and pressure from the European defence industry, especially
from the aerospace industry. Indeed, the LoI process started as a helping hand to the
industry, but has evolved into a more independent and comprehensive political process. It
also started as a political initiative to support the aerospace industry, but has gradually
encompassed the European defence industry in general. Furthermore, although the [US] is
hardly mentioned in the political statements, it is obvious that the Other is omnipresent and
that the American consolidation of its defence industry was an important driving force for
the European political process.” 1318
1314 Moerth (2003) p. 86
1315 Ibid., p. 86
1316 LoI (1998)
1317 The LoI defines a TDC as follows: A corporate, industrial or other legal entity within the territories of the
Participants, formed by, or consisting of, elements of Defence Industry from two or more of the Participants national
defence industries for the purpose of supplying Defence Articles or performing Defence Services.” Ibid., Annex B,
Definition of Terms.
1318 Moerth (2003) p. 109
264

In April 1998, the French, German, Italian, Spanish, and UK defence ministers had issued a Joint
Statement confirming that “a strong, competitive and efficient defence industry is a key element of
European security and identity as well as of the European scientific and technological base”. 1319 It is
important to reiterate that the perceived economic-technological competitive threat posed by the US
mega-primes to the European A&D industry was primarily civilian in nature. In fact, that is how the
EC as well as the relevant business players first defined “le nouveau défi américain” and
subsequently helped put it on the political radar screen of European governments. And even after
the (major) EU members did get involved at the political-military level to build “a strong Europe”,
it was clear that they were not trying to build on the planned A&D industry restructuring to turn the
EU into an all-out strategic rival to the US.
“[Like in the market field], the theme of the importance of a strong Europe is also a major
one in the defence field. However, the European experience in the two fields is interpreted
differently. In the defence field the EU is striving to acquire the strategic capability worthy
of a great power. There is no aspiration to become the equal of the [US] – for instance, in
nuclear weapons or aircraft carriers – but to have the independent capability for robust
military crisis management even at great distances from Europe proper.” 1320
At the same time, however, it was obvious that the EU and its major A&D powers recognised that
the US economic-technological (“low politics”) threat, if left unchecked, would ultimately have
important negative political-military / national security (“high politics”) implications, both for
Europe’s relationship with America and its relative standing and power position vis-à-vis the rest of
the world. In the post-Cold War era, after all, the traditional demarcation lines separating “low
politics” from “high politics” certainly became blurred, if not somewhat reversed (especially when
one considers the military spin-on effects deriving from civilian / dual-use technologies). Also, as
was already discussed in the previous chapter, increased international competition and the fight
over economic growth, technological innovation, and access to information could certainly be
“described in realist terms – as economic warfare between leading countries in the world”. 1321 This
analytical approach is particularly relevant for the A&D industry, which sits at the intersection of
“low politics” and “high politics”.
“By combining a ‘realist’, Machiavellian, approach to international relations with the
language of security and the economic insights of ‘strategic trade theory’, advocates of a
1319 LoI (1998), Annex A, Joint Statement of 20 April 1998
1320 Moerth (2003) p. 141
1321 Ibid., p. 160
265

more mercantilist approach have achieved some intellectual respectability and made some
impact, in the US especially.” 1322
For Europe’s leading powers, it was paramount to have a capable, internationally competitive A&D
industry; one that could withstand the expected onslaught of the American mega-primes and that
provided the Europeans with the necessary “marge de manoeuvre” (in terms of technological
capabilities, security of supply, etc.) to act militarily without US political backing or material
support (also outside NATO if required). Beginning in the late 1990s, European efforts to
collectively achieve more independence / autonomy in security and defence matters vis-à-vis
America had intensified significantly, both within the EU and NATO. While trying to become more
independent from the US, European countries deliberately made further moves towards creating an
“ever closer union”. These integrative efforts at the political, economic, and military level took
place both inside (Euro, ESDP, etc.) and outside (LoI 1323 , EADS, etc.) the EU’s institutional
framework.
In the case of EADS and the LoI, the companies and countries involved were willing, in principle,
to accept the increased mutual interdependencies and the associated potential political-military
vulnerabilities necessary to achieve the goal of an integrated European A&D base. Vis-à-vis the
American hegemon, in contrast, the same European countries were eager to avoid the very
dependencies and potential vulnerabilities resulting from having a small, fragmented, and
technologically inferior A&D industry that could not compete with the US. For EADS and the LoI
to materialise, it was necessary to have an “us. vs. them” threat perception and identity-creating
processes in Europe. The “Other” was clearly America and its mega-primes, both at the political
and the business level.
The creation of EADS (and the LoI) took place against this “threat image”, which “is not only
instrumental for actors in their pursuit of interests […] [but] also important in the European
identity-building processes”. 1324 In sum, the Europeans seemed more willing to trust each other than
they were willing to trust the Americans (at least within the EADS-LoI community of nations). Of
course, transnational A&D industrial integration in Europe was certainly facilitated by the trust and
institutional cooperation established following several decades of collective efforts to achieve “ever
closer union”. Furthermore, the four Airbus partners (three of which would subsequently form
1322 Cable (1995) p. 307
1323 While the LoI was established outside the’s EU institutional framework, it nonetheless made reference to the EU’s
CSFP “Code of Conduct on Arms Exports” for defence trade transactions involving non-LoI countries. See relevant LoI
provisions on “Export Procedures”.
1324 Moerth (2003) p. 159
266

EADS) were already cooperating through an aerospace consortium that was locked into a high-
stakes zero-sum transatlantic dogfight with Boeing: a set-up ideally suited to establishing “us. vs.
them” identity patterns.
That being said, America was not simply perceived as a unitary political-economic threat. European
A&D companies were very eager to explore partnership / merger options with their American
counterparts once the industry restructuring and consolidation on the Old Continent had reached a
critical mass. One must not forget that the US restructuring process served as a model for Europe:
the creation of a small number of big A&D players. The industrial consolidation processes on either
side of the Atlantic clearly interacted with each other. The fact that there were several different,
partly competing US mega-primes made it possible for European business executives to
(theoretically) conceive entering into potential alliances with select American players (for example,
BAE joining forces with LMC, EADS with NGC, etc.): “The case of armaments shows that the
[US] seems to be a friend and a foe [of Europe] at the same time.” 1325
Interestingly, many of the factors at play – EU integration, Airbus vs. Boeing dogfight, etc. – had
been present before without causing sovereign European countries to merge their major A&D assets
into one company. It took a “Perfect Storm”-type scenario in the late 1990s to achieve a goal that
had been politically impossible before. According to Terrence Guay and Robert Callum, four
factors explain that the European A&D industry “transformed itself from a collection of medium-
sized, nationally orientated firms to one dominated by two giants, with several smaller firms closely
linked to these leaders” 1326 : (1) “developments within the US defence industry; (2) the impact of
technology and defence economics; (3) general economic restructuring within the EU, coupled with
a nascent defence industrial policy; and (4) progress towards the creation of […] ESDP.” 1327
Writing specifically about the EU’s internal economic restructuring, Guay and Callum argue that “it
is possible that the arrival of the [E]uro, and confidence in the success of a common currency,
constitute a major reason why Europeans became more receptive to the idea of further integration in
defence”. From that perspective, sharing a common European currency served as a crucial building
block towards achieving the integration and shared control of the European A&D industry. It is
important to emphasise that these four factors are not independent variables. For example, Guay
and Callum posit that “an argument could be made that the external forces [(1) US defence
restructuring and (2) technology / defence economics] influenced the timing of the EU-specific
1325 Ibid., p. 160
1326 (Guay & Callum, 2002) p. 757
267

factors”. And indeed, the major strides in European A&D industry restructuring were made only
after the US mega-mergers were completed. In short, America took the initiative and acted, Europe
followed and reacted. In fact, “Given its dispersion among several countries, it was unlikely that
Europe’s defence industry would undertake much serious reorganisation before the US sector.” 1328
For sure, the process of globalisation and the changing dynamics of defence economics (rapidly
rising R&DP costs, etc.) affected A&D companies around the world. But as the industry and
technology leader, America was the first to wrestle with the dramatic changes that became apparent
after the Cold War.
Regarding the EADS “merger of mergers” 1329 , Guay and Callum draw particular attention to the
role played by the private sector in accounting for the fact that EADS succeeded while other
attempts to pull-off a cross-border A&D merger failed: “The best explanation is that the exigencies
of the new defence market had finally become impossible for industry executives to ignore.” 1330
Indeed, before the “urge to merge” became simply inescapable, A&D business leaders in Europe
were generally opposed to cross-border mergers for fear that such large-scale restructuring could
undermine the “cosy relationships” the different “national champions” had established with their
country’s respective political leadership and military-industrial complex. It is also true that the rapid
pace of US A&D industry consolidation in the 1990s – notably the BMD merger – sent European
business executives scrambling to achieve the size and critical mass necessary to ensure their
survival vis-à-vis the American mega-primes. In the end, Guay and Callum argue, it was the private
sector rather than the respective national governments concerned, that took the lead in pushing for
EADS.
“The creation of EADS was not driven by national leaders who had for years been
preaching the importance of consolidation – sermons that inevitably came to a naught over
the political price of job losses; on the contrary, during the highly secretive discussions that
led to EADS, the industry executives involved made a conscious and calculated decision to
keep their respective national leaders uninformed of the plans until the negotiations had
reached an advance stage. By such discretion, political meddling in what was essentially a
business decision was kept to a minimum.” 1331
1327 Ibid., p. 757
1328 Ibid., p. 769
1329 In the context of EADS, the term “merger of merger” refers to the fact that several “national champions” agreed to
merger their various A&D assets into one new, fully integrated transnational company.
1330 (Guay & Callum, 2002) p. 758
1331 Ibid., p. 761
268

The initial merger discussions between BAe and DASA were certainly private-sector driven. Both
companies were privately held and primarily (if not exclusively) driven by business objectives;
factors that explain their natural affinity to one another. As a result, BAe and DASA were less
influenced by political considerations than their French counterparts, notably state-owned
Aérospatiale before its partial privatisation and merger with the Lagardère Group’s MHT to form
AM in June 1999. On the French side, businessman Jean-Luc Lagardère emerged as the central
player in the EADS merger discussions with DASA. 1332 On the German side, DCX CEO Juergen
Schrempp took the lead in negotiating with the French. 1333 As private-sector executives, both
Lagardère and Schrempp were instinctively wary of political interferences by their countries’
respective leaders and therefore decided to keep the EADS merger discussions largely secret. In the
end, however, top-level political backing from the participating countries’ governments, especially
in Paris, was indispensable for the EADS negotiations to succeed:
“The St. Malo and Helsinki declarations provided the political support for private sector
reorganisation. For instance, it is unlikely that the French government would have
acquiesced to a merger between Aérospatiale and DASA much before 1999.” 1334
Earlier pronouncements such as the 1998 LoI also demonstrate that key European governments
were, in principle, increasingly willing to move beyond the traditional national security concerns
and constraints of the past. European A&D companies, along with the EC and relevant industry
associations, were among the first to put the competitive threat posed by America’s mega-primes on
Europe’s wider political agenda. Like in the case of the actual EADS merger discussions, the
private sector took the lead in formulating a (first conceptual) response to “the American
challenge”. But in-between recognising a problem (i.e., Europe risks being left behind in an
economically and strategically important high-technology sector) and trying to provide an adequate
private-sector response (i.e., to engage in cross-border consolidation and restructuring to achieve
the necessary economies of scale) must come the implicit or explicit political backing of the
relevant European governments concerned.
In stark contrast to most other “normal” industry sectors, the primary concern of national political
leaders when evaluating the potential implications of cross-border consolidation and restructuring
operations in the A&D business has not traditionally been about securing jobs at home. Rather, the
primary concern has been about the potential national security implications – i.e., (in)security of
1332 Schmitt (2001)
1333 Ibid.
1334 (Guay & Callum, 2002) p. 770
269

supply, etc. – associated with being dependent or interdependent on a foreign company or
government for hardware or technology deemed relevant for protecting the country’s military and
geo-economic security. Making sure that jobs and, even more importantly, relevant R&DP
capabilities remain on national territory are certainly a relevant sub-set of considerations in
evaluating virtually any international M&A transaction, both for the corporate and the political
players involved. However, it would be a mistake to attribute the long-time inability of Europe’s
A&D companies to form fully integrated cross-border corporate entities merely to “concerns at
potential job losses” among the different national governments involved. If considerations about
maximising economic utility had really trumped national security concerns, Europe’s major A&D
companies (that is, at least those forming the Airbus consortium) would have fully integrated their
operations long before AIC or EADS (which initially comprised only three of the four Airbus
players) saw the light of day.
In spite of (or possibly because of) adopting a “national champions” approach, Europe’s fragmented
A&D industry – essentially “a collection of medium-sized, nationally-orientated firms” 1335 –
punched below its international weight and stature for decades. How else could one explain
Boeing’s exceptional civil aircraft market position immediately after the BMD merger? 1336 The
pressures to engage in full-fledged cross-border M&A transactions were somewhat softened by the
fact that Europe’s major A&D players did cooperate internationally, both among themselves and
with non-EU partners (primarily with the US for that matter). And to a certain extent, the
remarkable success of Airbus seemed to suggest that the status quo was not only tenable but also
working. At the same time, however, these international collaborative efforts were generally very
limited in scope and duration. As a result, they were therefore also often subject to the economic
pitfalls generated by “juste retour” policies and the uncertainties created by shifting politico-
military procurement priorities (for example, Germany’s trimming of the Eurofighter and its
A400M military transport orders). One additional reason for companies wanting further cross-
border integration was the awareness that development costs for each major new civil / military
aircraft were so huge that government support – by several governments – was indispensable.
For the EADS project to go ahead, the respective national governments (prodded, for sure, by the
A&D sector) first had to come to the conclusion that the anticipated negative consequences of
inaction (i.e., maintaining the status quo and not engage in major cross-border restructuring and
consolidation) outweighed the potential risks associated with giving up (partial) direct or indirect
1335 Ibid., p. 757
270

(in the case of privatised companies) national control over their major A&D assets. Europe’s major
governments confronted the fundamental choice between seeing their “national champions”
steamrolled by the American mega-primes and consolidating at the European level by “accept[ing]
mutual interdependence and the possibility of abandoning industrial capacity” 1337 . In the end,
Germany and France (subsequently joined by Spain) opted for transnational integration and created
EADS. For DASA, the bilateral link-up with AM was admittedly only a second-best solution; but it
was arguably the only merger option left after BAe’s acquisition of GEC-Marconi.
Given the generally close relationship that even fully privatised A&D companies such as BAe /
BAE maintain with their home governments, it goes without saying that the (ultimately abandoned)
merger talks with DASA would have certainly required top-level political backing for their
successful conclusion. There are also reports that the British government did not really like the
BAe-Marconi deal and “would have preferred a marriage between Marconi and Thomson-CSF in
support of the reorientation of its European defence policy, as symbolised by the Anglo-French St.
Malo declaration […]”. 1338 This episode illustrates at least the relative political independence of
privately-owned BAe vis-à-vis the British government compared to the much more “dirigiste” ties
connecting the French government to A&D industrial base.
The willingness by European governments, expressed in their 1998 LoI, to “accept mutual
interdependence and the possibility of abandoning industrial capacity” was of fundamental
importance for all the corporate players involved. Knowing that they had been given the top-level
political green light, corporate executives at DASA, AM, BAe, etc. then felt free to pursue potential
industry restructuring options beyond the confines of the traditional “national champions”
approach. Previously, the private sector players would not even have envisioned major EADS-style
cross-border mergers as these would have surely been opposed on national security grounds by at
least one of the European governments concerned.
At the same time, it is also clear that the pressures of globalisation and the related growing
internationalisation of the A&D industry in Europe and America (i.e., cross-border M&As,
collaborative JVs 1339 , or the reliance on foreign-sourced / foreign-controlled parts or technologies)
resulted in a greater marge de manoeuvre for the corporate players vis-à-vis their respective
national governments:
1336 “Despite a 30 percent market share, Airbus still only has 13 percent of the fleet of civil airliners flying and less than
10 percent of the seats, making it effectively a market entrant still for decades to come.” Bruce (1999) p. 127
1337 LoI (1998)
1338 Schmitt (2000) p. 36
271

“What is novel about this […] movement towards greater Europeanisation of defence
matters is undoubtedly the reversal of roles: it is no longer governments that are steering
European cooperation on armaments but industry itself that is moving ahead of political
constraints and adapting them, precipitating change and now acting as a driving force in
the implementation of common defence.” 1340
In retrospect, Gnesotto’s sweeping statement might well be described as premature and overly
broad. 1341 To this day, the French and German governments remain the ultimate arbiters when it
comes to making strategic EADS decisions: who are the top EADS / Airbus executives in charge
and what’s their distribution / break-down in terms of nationalities? Where and how should EADS
restructure its operations, close factories, cut jobs, etc.? While the German government would
generally prefer to adopt a hands-off / laissez-faire approach vis-à-vis EADS, continuing
interferences by the French political leadership in the company’s management have made it
imperative for Berlin to respond in kind to safeguard Germany’s political, economic, and military
interests. In fact, rather than acquiesce to German demands that Paris sell its remaining 15-percent
stake in EADS, the French Senate published a report in June 2007 calling on Berlin to take a direct
stake in EADS “to guarantee its interests in the company”. 1342 So far, Germany has refused to take a
direct stake in EADS, but has confirmed it was studying a potential “golden share” arrangement
that would formally give Berlin special veto rights over strategic decisions (to fend off unwanted
investors, etc.). 1343 In that sense, EADS can certainly be described as a regiocentric company
“blending strategic interests with regional integration / national sensitivity”. 1344 One of the long-
term obstacles to transnational integration in the A&D sector was the underlying French
determination to retain strategic direction from Paris, even as others merged into a European
conglomerate. This issue is still not entirely resolved. BAe resolved it by opting out; German
executives and policy-makers are still fighting…
1339 JV = Joint Venture
1340 Gnesotto (July 2000) p. v
1341 Another analyst, writing about the defence industry’s growing internationalisation ten years earlier, came exactly to
the opposite conclusion: “Why multinationalism? [defined as the rise of multinational corporations that ‘control the
shape and level of R&D spending and corporate investment in more than one state’] […] In many ways [this trend] can
be summarised as reflecting the readiness of governments to compromise political preferences for security of supply in
order to bring to bear the economic pressures of competition and scale which they hope will bring lower, or rather more
bearable, prices. Corporate behaviour reflects changing tolerances and policies on the part of governments.” Taylor
(1990) pp. 66-67
1342 (Reuters & AP, 2007)
1343 The Daily Telegraph (2007)
1344 Hayward (1999) p. 9
272

7.3 Britain and the US Defence Market
Given the long-standing UK-US “special relationship”, senior BAe executives reasoned that they
stood a better chance of penetrating the highly lucrative American defence market (and sealing a
potential transatlantic merger of equals) if they stayed clear of continental European (especially
French) entanglements and instead signed a deal in January 1999 to acquire GEC-Marconi to forge
BAE Systems. The US$12.7 billion acquisition made BAE the biggest foreign defence contractor in
the US. 1345 1346 1347 In mid-November 1999 – even before BAE CEO Weston obtained formal
regulatory approval to take over Marconi’s US subsidiaries – he was told by the Clinton
administration that further acquisitions in the US would be “welcome”. 1348 In private talks with
Weston, Deputy Defense Secretary Hamre conveyed that Washington was opposed to a “Fortress
Europe” vs. “Fortress America” approach in defence consolidation. The Pentagon’s #2 official also
encouraged BAE to look at ways of expanding its activities in the US market. 1349 Soon after
completing the take-over of Marconi and its US subsidiaries (including Tracor) in November 1999,
BAE made a bid to acquire Lockheed’s electronics warfare unit AES, including its crown jewel
Sanders, the biggest US electronic warfare company. Interestingly, two of the four bidders for AES
were either a foreign-owned company (BAE) or had a foreign partner in their consortium (EADS
had formed a 20-80 consortium with US-based L-3 Communications). 1350
While Pentagon representatives were adamant that they did not pressure LMC to choose a US
bidder over their foreign rivals, it is also clear that at least a few senior DoS and DoD officials
leaked their concerns about the BAE and EADS bids to the press. Vago Muradian provides a
1345
In June 1998, GEC-Marconi’s North American subsidiary completed the US$1.4 billion acquisition of advanced US
defence electronics company Tracor. The UK-US take-over deal received US regulatory approval (CFIUS, etc.) in less
than two months; a remarkably short time span given the highly sensitive nature of Tracor’s sensitive Pentagon
projects. The Pentagon’s take-over approval was granted based on the condition that GEC-Marconi establish a “proxy
board” composed of US citizens with appropriate security clearances in charge of management operations on a day-today
basis. With the acquisition of Tracor, GEC-Marconi became the largest foreign-owned defence company operating
in the US, and the fifth-largest Pentagon defence contractor overall. GEC-Marconi was rechristened Marconi
Electronics Systems (MES) before it was spun off from GEC to merge with BAe.
1346
At the time of their 1999 merger, BAe and MES had a combined annual US turnover of US$3 billion, making BAE
the biggest foreign-owned defence contractor operating in America. Muradian (November 1999)
1347
In 2006, BAE CEO Turner emphasised that his firm was pursuing a “core strategy of being the premier transatlantic
defence and aerospace company”: “In the US we now have a business that turns over some [US]$10 billion a year,
employing 38,000 people in 36 States. We are involved in key programmes for the [DoD], where we now rank as the
7th largest contractor, and for the Intelligence and other federal agencies. […] Although we are headquartered in
London, almost 50 [percent] of our shareholders are American, 26 [percent] of our revenues come from sales in the US,
and almost 40 [percent] of our 100,000 employees are in the US.” Turner (2006). According to unnamed US
government sources, BAE North America already employed “more than 1,500 US citizens with top security clearances
or above” at the time of its bid for AES / Sanders. Muradian (June 2000)
1348
Harrison (November 1999)
1349
Ibid.
1350
The two other AES bidders were American (NGC and private equity firm Carlyle Group).
273

fascinating insiders’ perspective on these US national security concerns and the corresponding
underlying anti-foreign / anti-European sentiment and distrust:
“‘I don’t see what’s gained in selling one of the most important capabilities we have, that
no one else in the world can match, to an overseas buyer,’ one senior State Department
official said […]. ‘Any way you look at it, electronic warfare is a very sensitive technology,
and very sensitive equals very important, and very important equals must be controlled.’
[…]
‘With L-3-EADS, the problem is ‘How comfortable are you with the French?’ […] [a]
senior defence official said. ‘There are lots of people who still feel that their [French]
security is not compatible with the [US]’, in which case would you sell a particularly
sensitive capability to a company with a major French component before you go through a
process of demonstration that there are adequate technology safeguards? There are people
1351 1352
who say this is too early to do that.’”
Speculation that the BAE bid for AES-Sanders could be derailed was also fuelled by the April 2000
departure of Deputy Defence Secretary Hamre, one of the Clinton administration’s most prominent
champions of closer transatlantic A&D industrial links. In an interview I conducted with Dr. Hamre
in May 2007, the current President and CEO of the Center for Strategic and International Studies
(CSIS) confirmed that he was convinced that BAE’s acquisition of Tracor and AES-Sanders posed
no threat to US national security. In Hamre’s view, the security standards and firewalls established
by BAE through its US subsidiary even exceeded the security measures taken by many US A&D
companies. In the end, the BAE-AES deal received Washington’s regulatory approval in late
November, making it the biggest transatlantic defence merger to date. 1353 BAE’s unprecedented
1351
Muradian (June 2000)
1352
US suspicions of the French, and their relaxed approach to third-country exports, remained much stronger than of
the UK or even Germany.
1353
Shortly after the BAE-Sanders take-over deal was announced, one US journalist described the following scenario to
illustrate the potential problems and risks associated with the acquisition of a leading US defence company by a foreign
rival: “One of the most troublesome issues in the sale of Sanders to a non-US company [BAE] is the matter of
protecting newly acquired sensitive intelligence data, although Britain is one of our closest allies, and typically there is
close coordination between the two nation’s intelligence agencies. For example, if the Pentagon’s Defence Intelligence
Agency learns that Russia is developing a new antiaircraft missile designed to counter the signal radiated by the ALE-
55 towed decoy, in the past Sanders would be promptly informed so it could develop an effective countermeasure.
Observers question whether word of a new Russian threat and a Sanders-developed countermeasure could be withheld
from BAE’s management. The reason is that BAE, which is developing the FOTD [Fiber-Optic Towed Decoy] for the
new Eurofighter, would need to incorporate a similar fix as quickly as possible. Further, it seems likely that the problem
/ solution would leak to France’s Thomson-CSF which has a joint program with BAE to develop a FOTD for French
military aircraft. A related problem is likely to arise in dealing with BAE’s foreign sales. For example, if BAE obtains
British government approval to sell its Eurofighter FOTD to a former Soviet Bloc country, which the Pentagon opposes
because the British FOTD employs a novel modulation similar to one devised by Sanders for the ALE-55, will BAE
need to prove that the technique originated in its British operation?” Klass (2000). According to press reports, US
Defense Secretary William Cohen also requested “to be kept continually briefed on the status of the transaction as it
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take-overs of Tracor and AES / Sanders were a powerful reminder that “The British are trusted with
technology, and are allowed to buy into the US market, in a way that the French and the Germans
1354 1355
are not.”
In February 2000, following twelve months of negotiations, US Defense Secretary William Cohen
and his British counterpart Geoffrey Hoon had signed the “US-UK Declaration of Principles for
Defence Equipment and Industrial Cooperation”. 1356 The non-binding declaration was to provide a
road map for strengthening bilateral US-UK defence industrial cooperation, notably with regard to
“harmonization of military requirements, assurance of supply of defence goods and services, export
procedures, information and technology security, ownership in corporate governance, and R&D
cooperation”. 1357 According to senior Pentagon officials, the declaration reflected the fact that the
US had become “more open-minded” about defence industrial cooperation, both with regard to the
UK and other allies around the world. 1358 The May 1997 take-over of Tracor by GEC-Marconi was
described as “groundbreaking in the sense of the size of the deal, the complexity of the deal, and the
sensitivity of the technology involved”. 1359 The Pentagon also reiterated its opposition to fully-
fledged transatlantic mega-mergers (at the prime contractor level) and instead argued in favour of
more joint US-European projects (teaming arrangements, joint ventures of varying size and
complexity) as viable alternatives. The Pentagon’s opposition to such mega-mergers was “not […]
a matter of philosophy, but […] a matter of practicality”. 1360
During my interview with Dr. Hamre, he pointed out that the BAe-Marconi merger had made it
virtually impossible to achieve a full-blown US-UK mega merger in the future (i.e., NGC-BAE).
LMC and Boeing (or whatever firms were left out) would have strongly lobbied against any US-UK
moves through the regulatory process. Sources have said that Cohen’s request is unprecedented, but necessary given the
importance of AES to US national security.” Muradian (September 2000)
1354
(Guay & Callum, 2002) p. 761
1355
Washington and London maintain a bilateral “Defence Priorities and Allocations System” (DPAS) allowing the two
governments to “seek urgently needed (often classified) equipment through firms that have signed up to special
streamlined order-processing procedures”. UK House of Commons (2003) paragraph 44. “Since 1990, the UK has
received such US assistance under these provisions on 170 occasions (including on eight for the recent Iraq War), while
the UK has assisted the US four times. Ibid. (footnote no. 115)
1356
(US DoD & UK MoD, 2000)
1357
DoD (2000) p. 2
1358
At the time, the Pentagon was involved in similar talks with France, Germany, the Netherlands, and Australia.
Furthermore, the US confirmed that Sweden would eventually also be included in that group. See Ibid., p. 6. James
Bodner, the Principal Deputy Under Secretary of Defense for Policy, expressed the Pentagon’s rationale behind the new
“open-mindedness” towards international defence industrial cooperation as follows: “[E]nsuring [US] national security
requires that we do both – we have to have effective export controls and technology security, and we also have to have
effective mechanisms for international cooperation in defence products and services. We need to prevent technology
from going where we do not want it to go, and at the same time we have to facilitate the technology transfers to and
from those with whom we expect to conduct military operations in the future.” Ibid., p. 1
1359
Ibid., p. 5
1360 Ibid., p. 8
275

merger deal involving BAE Systems by arguing that it put the other US players at a distinct
competitive disadvantage vis-à-vis the newly created transatlantic defence giant. In other words, if
it had not been for the creation of BAE Systems, BAe and GEC-Marconi individually would have
been prime candidates for potentially two separate US-UK equity mergers involving at least two
different American partners. “The Brits have themselves and the BAe-Marconi deal to blame for the
fact that there were no transatlantic mega-mergers.” 1361
Despite the long-standing “special relationship” between Washington and London, the DoD
representatives acknowledged that there still remained major political and institutional barriers
preventing closer US-UK (let alone transatlantic / international) defence industrial cooperation;
chief among them complex, cumbersome US export licensing procedures. 1362 According to its
Pentagon backers at the same time, the Declaration of Principles laid forth “a road map that we
intend to walk down, leading potentially to other agreements that would be legally binding, that
would in fact change systems and processes”. 1363 In the end, however, British hopes that this
document would herald a major shift in American strategic thinking and significantly facilitate
closer US-UK defence industrial cooperation would be dashed.
Most disappointingly, there was only very little progress regarding the easing of US export
restrictions. Washington did not grant Britain the much-coveted ITAR waiver status, an important
step that would have made it much easier for companies active in both countries to transfer
unclassified defence goods and technologies across the Atlantic without first going through the
regular export licensing processes. According to BAE Chairman Sir Richard Evans, “the principal
[ITAR waiver] benefit would be a much greater degree of interchange between individuals engaged
in our companies on joint programmes […].” 1364 While the US-UK negotiations were delayed by
the change of administrations in Washington as well as the 9/11 attacks, both sides had largely
reached an agreement on the ITAR waiver by 2002. 1365 However, the deal was defeated in the
House of Representatives, where Henry Hyde (R-IL), Chairman of the International Relations
Committee, refused to pass the agreement – above all for reasons related to US national security /
“leakage” of US technology to third parties. 1366
1361
Hamre (2007)
1362
“In preparing to have these discussions with the [UK], [the Pentagon] […] surveyed some US concerns and asked
for their views as to what the impediments, were. And the largest single impediment that was identified by everyone
was the export license process, […] an area that we are paying particular attention to.” DoD (2000) p. 3
1363
Ibid.
1364
UK House of Commons (2003) paragraph 47
1365
Ibid., paragraph 49
1366
Ibid., paragraph 49. House Armed Services Committee chairman Duncan Hunter (R-CA) was another prominent
opponent of the UK ITAR waiver.
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To this day, America has failed to grant ITAR waiver status to Britain, and the matter has become a
source of growing disappointment and frustration on the other side of the Atlantic. As Pierre Chao
and Robin Niblett warned in May 2006:
“In the last few years, […] one long-standing irritant is growing into a major tension and
now threatens the closeness of the bilateral [US-UK] relationship. The issue revolves
around the limits and restrictions that [America] imposes upon UK access to US defence
technologies, and the inability or unwillingness of successive US administrations to change
the situation measurably despite their stated intention to do so.” 1367
The core of the problem is that the UK, while being America’s closest security ally, is also viewed
by policymakers in Washington “through the lens of its potential – like any other country – to be a
gateway for sensitive US technologies to third countries or actors”. 1368 For the United States,
“maintaining technological superiority over all potential adversaries is a central national
priority”. 1369 While American restrictions on UK (and transatlantic / international) technology
transfers are primarily driven by US national security concerns, Chao and Niblett also identify
related commercial / mercantilist motivations.
“Some US officials as well as corporate executives are not always disposed to give to their
UK partners intellectual property and technologies that have been developed with
substantial amounts of US taxpayer dollars while the UK is unable to make equal
investments to achieve similar advances – especially when such transfers could enhance the
competitiveness of UK defence firms vis-à-vis their US counterparts in the UK, European,
and global defence markets. 1370
Chao and Niblett warn that restrictions on US defence exports and technology sharing, if left
unaddressed, could have potentially serious negative political, military, and economic repercussions
for both countries. From the British perspective, the existing impediments to closer US-UK defence
industrial cooperation interfere with London’s stated objective of achieving “operational
sovereignty” over its key weapons systems. To that end, the UK wants to be in a position to
independently “maintain, operate, upgrade, and modernize its key weapons platforms purchased
from the [US] or other third parties”. 1371 1372 Of course, British firms already enjoy much better
1367
(Chao & Niblett, 2006) p. 9
1368
Ibid., p. 25
1369
Ibid., p. 6
1370
Ibid., p. 26
1371
Ibid., p. 4
277

(i.e., more lucrative) access to American technologies and the US defence market than any of their
European competitors. 1373 That preferential access, however, comes with certain trade-offs and with
a certain price. BAE, for example, is compelled to create “two-pillar structures that undermine the
logic of having Anglo-American defence firms and limit the hoped-for synergies”. 1374
“If the issue of information and technology exchange is not ultimately resolved, shareholder
pressure and management frustration will force an unwinding of these transatlantic
industrial relationships, to the detriment of both the [US] and UK.” 1375
“[I]f the [US] and the UK, the two closest of allies, are unable to overcome the continuing
obstacles to the efficient sharing of defence-related technologies, what hope is there for
1376 1377
broader transatlantic defence industrial and technological cooperation?”
As one US analyst summed up Europe’s difficulties to enter the American defence market:
“For European arms producers, then, entrance into the US military market for sales and
collaborative programs is critical for both the economic viability of their defence industries
and the technological sophistication of their armed forces. However, it entails a Hobson’s
choice: accepting US technology-transfer constraints. Unwilling to lose control over the
destination and use of its exported technologies, services, and technical data, the [US]
requires that even close allies agree to retransfer / end-user restrictions and conform to key
US export controls. From the perspective of other governments, the cost of entry to the US
market is increased dependence for them and greater political leverage for the [US].” 1378
1379
1372 “The central British concern was their desire for operational sovereignty. The UK did not seek, or need, to produce
or own [IP] for every part of the JSF. But the UK asserted the need to make deliberate and independent decisions on a
capability – especially in an operational context. In their view, the UK forces must be able to operate independently and
without continually seeking permission – or worse, struggling to get permission – for the latest software updates, threat
information, etc. The UK has its own operational approach and seeks to act autonomously in operations, even when
operating systems they acquire from or develop with the [US].” Bialos (2009) vol. II, p. 573
1373 (Guay & Callum, 2002) p. 761
1374 (Chao & Niblett, 2006) p. 5
1375 Ibid., p. 5
1376 Ibid., p. 3
1377 “[T]echnology licensing on the JSF remains a sore spot to this day and highlights an underlying reality of the longstanding
US policy of keeping defence strategy and armament cooperation largely divorced from technology transfer
policy. JSF is only the latest of a series of cooperative programmes on which the [US] and its allies have faced
intractable technology issues.” Bialos (2009) vol. II, p. 573.
1378 Neuman (2006) p. 439
1379 There are also long-standing European suspicions that US end-user controls were sometimes misused (and had been
misused) to disadvantage European companies when competing for exports with US firms.
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Chapter 8: Conclusion
This thesis uses the theory of realism to demonstrate that transatlantic rivalries over the political,
military, economic, and technological power and prestige derived from the A&D industry exist
even among close Western NATO allies. The specific findings of this thesis can be summarised as
follows: the US – which became the world’s sole superpower after the end of the Cold War –
adopted an ethnocentric approach to US A&D industry consolidation in an effort to better defend its
hegemonic position in the international system vis-à-vis potential challengers, both in Europe and
beyond. Realist / neo-mercantilist concerns about the potential national security / economic risks
associated with foreign dependence, unauthorised technology transfers / proliferation, as well as the
implications of foreign ownership, control, and influence vis-à-vis the US domestic A&D industrial
base clearly shaped the choices and preferences of policymakers in Washington, DC, particularly on
Capitol Hill.
The US government and especially Congress feared that large-scale, full-fledged transatlantic A&D
mergers could seriously undermine America’s military-technological lead by facilitating potential
leakages of sensitive military / dual-use technologies to European NATO partners as well as third
countries around the world. Commercial aerospace companies also provide significant economic
benefits (including export earnings, jobs, and technology clusters) for their respective home
countries, thus providing powerful neo-mercantilist incentives for national governments to prevent
these firms them from falling into the hands of foreign competitors. In America, aerospace
companies have been the most important industrial contributor to US merchandise exports since the
1950s. In 2008, for example, that leading US export sector alone had a positive external trade
balance of more than US$62 billion while the country as a whole ran a gaping trade deficit (-
US$816 billion). To ensure that the defence / military as well as the economic-technological
benefits of that key strategic industry sector continued to benefit primarily the United States,
policymakers in Washington decided to foster the creation of US mega-primes under American
control and majority-ownership. After all, if US companies had been allowed to merge with their
European counterparts, the US government would have enjoyed far less influence and leverage over
these new transatlantic mega-primes than is otherwise the case under the constraints of an
ethnocentric consolidation of the American A&D industry.
This ethnocentric approach to A&D industry consolidation is fully in line with the key tenets of
realism, which would predict, in essence, that sovereign, independent states will try to prevent
strategic companies / industries of critical importance to their national security and survival from
coming under full or even partial foreign control. During the 1990s, relations between Washington
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and many of its European allies were strained over a number of different issues, ranging from the
Kyoto Protocol to the ICC as well as the EU’s attempt to establish a common security and defence
policy to act independently of the US and NATO if necessary. Since America and Europe were no
longer united by a common Soviet threat and found themselves increasingly at odds over the
fundamental principles governing the exercise of power in the international arena (unilateralism vs.
multilateralism, etc.), it is not surprising that Washington was not eager to provide the Europeans
and their A&D players with the substantial relative gains (in terms of access to US state-of-the-art
technologies, etc.) that full-fledged transatlantic mergers of equals would have entailed.
Washington also feared the potential proliferation of sensitive US technologies from Europe to third
countries and that such transfers could result in countermeasures that would jeopardise the
survivability of US systems. France’s relatively liberal export control policies were deemed to be of
particular concern.
According to realism, international cooperation is constrained by sovereign states’ fears that such a
strategy could (1) cause a relative shift in the existing international balance of power configuration
(i.e., by allowing one of the partners to derive a disproportionately greater benefit from cooperation
than the other) and (2) create new national security vulnerabilities due to the increased dependency
on other countries associated with heightened cross-border cooperation. In the US case, realist-type
considerations were certainly driving the ethnocentric approach to A&D industry consolidation
adopted by Washington in the 1990s. In realist terms, the potentially uncontrolled diffusion of
proprietary, cutting-edge US technologies in the strategically important A&D sector – be they for
military, civilian, or dual-use purposes – to European countries and beyond certainly risked causing
a corresponding (relative) loss of American power and influence vis-à-vis the rest of the world. In
fact, after it had emerged as the world’s sole superpower during the early 1990s, the American
hegemon stood even less to gain and even more to lose from international / transatlantic A&D
industrial cooperation than during the Cold War – a time when transatlantic A&D trade (the success
of Airbus notwithstanding) was essentially a “one-way street” from America to Europe. In
November 2002, Burkard Schmitt provided a succinct summary of the various factors hampering
closer transatlantic A&D industrial cooperation:
“In the US, both the political leadership and the armed forces are extremely reluctant to
rely to any extent on foreign suppliers. On the other hand, in Europe there is widespread
anxiety in many arms-producing countries about the possibility of US market hegemony.
Both attitudes make it very hard to create a positive political climate for transatlantic
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armaments cooperation. Even more important, transatlantic cooperation is hindered by a
fundamental imbalance of power between the US and Europe: […]
The US has such enormous financial resources, defence-industrial assets and military
capabilities that they simply do not need armaments cooperation or arms imports. From the
US perspective, the potential benefit of transatlantic cooperation is, at best, the cohesion of
the Alliance. This argument, however, is hardly sufficient to overcome bureaucratic and
political resistance. […]
Last but not least, the US pursues an explicit and coherent strategy for defence-related
industries, aimed at technological superiority in all relevant sectors.” 1380
The Clinton administration’s call for major A&D industrial consolidation at the 1993 “Last Supper”
was primarily driven by the projected drastic post-Cold War cuts in Pentagon procurement, R&DP,
etc. during the 1990s. Washington stressed that it wanted the various US prime contractors to
consolidate quickly to reduce overcapacities and drive down costs in order to allow the Pentagon to
get “more bang for the buck”. It appears that the DoD planners were trying to seize on the unique
strategic opportunities afforded by America’s “unipolar moment”. For the American hegemon it
was important to use its massive (military) procurement and R&DP dollars wisely to preserve its
dominant position in the A&D industry well into the 21 st century. In retrospect, one can of course
argue that the unprecedented consolidation process in the American A&D sector was bound to
occur anyway and would have happened even without US government intervention:
“Today, the industry is stronger than it would have been absent consolidation, albeit not
without major challenges remaining. Not only has the government benefited greatly, so did
the shareholders. Sadly, the burden was borne by that large number of very loyal, able
employees who paid the price of the restructuring as the industry downsized and their jobs
vanished. […] Perhaps the greatest irony is that it was inevitable that much of this
restructuring would occur sooner or later, anyway.” 1381
The sequencing of events on both sides of the Atlantic clearly indicates that large-scale A&D
industry consolidation was driven by the US, with the Europeans lagging behind and essentially
confined to a largely reactive role. The unique status of the US A&D industry as the strategic
industry sector par excellence – one that remains largely closed off even to America’s NATO allies,
including Britain – is powerfully illustrated by the fact that major transatlantic M&A deals took
place in many non-strategic business sectors during the 1990s. European companies moved to
1380 Schmitt (2002)
1381 Augustine (2006)
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acquire or merge with major US companies – including Chrysler, BankersTrust, and VoiceStream –
and were ultimately able to overcome all obstacles (political, regulatory, or otherwise) to
successfully conclude their M&As. In other words, the A&D business is arguably the one major
industry sector where large-scale, full-fledged transatlantic M&A merger of equals involving US
prime contractors and their European counterparts have never even been attempted because they
would have most certainly been blocked by either the US government or lawmakers on Capitol Hill.
In that sense, the US A&D industry – despite the undeniable pressures of globalization embodied
by increasing internationalisation and cross-border collaboration that have become even more
apparent in recent years – remains to this day a unique, strategic industry sector with enormous
relevance for American national security and military-technological leadership in the world.
The closest that the Clinton administration – or any US administration for that matter – came to
supporting a full-fledged transatlantic A&D merger was when the Pentagon’s senior leadership
(primarily Deputy Defense Secretary Hamre) contemplated a potential NGC-BAe link-up as an
alternative to the blocked NGC-LMC merger. In the end, however, this really bold idea never
materialised. In my interview with Hamre, he emphasised repeatedly that the Pentagon, in principle,
had been “open” and “receptive” to such a transatlantic deal. In the end, according to Hamre, the
surprise BAe-GEC-Marconi merger announced in January 1999 spelled the end of the envisioned
NGC-BAe tie-up. Once BAE Systems had been formed, a full-fledged transatlantic merger with
NGC was no longer feasible, since rival US companies (primarily Boeing and LMC) would have
strongly lobbied against the creation of such a powerful competitor.
In Dr. Hamre’s view, a NGC-BAe merger (potentially followed by other US-UK / transatlantic
A&D deals) would have been the most effective step to prevent the potential emergence of a
protectionist and antagonist “Fortress America” vs. “Fortress Europe” scenario. It is doubtful,
however, whether even the strong backing by a handful of senior Pentagon officials would have
been enough to overcome the deep-seated hostility and scepticism within Congress (and the State
Department) vis-à-vis full-fledged A&D mergers with European companies, even one with such an
excellent security track record such as BAe. But even if the envisioned NGC / BAe deal had come
to fruition, it would most likely have done little, if anything, to pave the way for a full-fledged
merger between other American mega-primes and their Continental European counterparts. US
realist / neo-mercantilist concerns about the potential national security risks associated with A&D
industrial cooperation with mainland Europe were even much greater than those related to working
with UK companies.
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In Europe, the transnational EADS merger can also be explained and interpreted by a
predominantly realist analytical framework. By pooling their major A&D assets into one company,
France, Germany, and Spain were trying to foster the creation of an economically and
technologically competitive European champion that would be able to survive the onslaught of the
emerging American mega-primes. It is important to differentiate between the interests and
motivations of European corporate leaders and their political counterparts. For the key French and
German private sector A&D executives driving the EADS deal (the Lagardère Group’s Jean-Luc
Lagardère and DaimlerChrysler’s Juergen Schrempp), the merger was above all about improving
their relative international competitiveness by gaining the critical mass necessary to realise
economies of scale that could only be reached by going beyond the confines of the respective
French or German “national champions”. Their primary motivations were business-driven, focused
on maximising corporate profits and shareholder value.
Lagardère and Schrempp each wanted to join forces and “balance” against the US mega-primes to
avoid being permanently relegated to the status of much smaller, technologically inferior A&D
subcontractors for the Americans. This kind of “technology-gap fever” was essentially the primary
motivation behind earlier catch-up efforts led by the EC and the relevant industry associations,
which put the issue of Europe’s threatened competitiveness (again) on political radar screens in the
mid-1990s. According to neo-realism, international tensions, rivalries, and conflicts among
sovereign states are not merely played out in the “high politics” arena of traditional military
security. Neo-realism adopts a much broader analytical approach to inter-state competition for
power, influence, and security. In particular, it recognises that the “low politics” of economics and
technology are important shapers of state motivations and capabilities in the anarchic international
system. From a realist / neo-mercantilist perspective, a country’s A&D industry is arguably a
unique strategic sector, sitting right at the intersection of national security (“high-politics”) and
business / economics / technology (“low politics”). In recent decades, the industry’s strategic
position has been further strengthened by the growing importance of dual-use technologies relevant
for military security as well as economic power and international competitiveness, with the two
latter factors being key sources of national power and greatness in a globalised world economy.
Neither the French nor the German business leaders involved in the creation of EADS had any
interest in seeing this transnational merger foster the emergence of a “Fortress America” vs.
“Fortress Europe” confrontation. Escalating protectionism on both sides of the Atlantic would have
severely hurt EADS’s bottom line. A&D industry leaders in Germany and even France (let alone
the UK) shared a strong desire to gain access to the lucrative American defence procurement
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market. From the private sector’s perspective, the Franco-German EADS merger must therefore be
seen as a potential stepping stone towards achieving more, closer, and above all more balanced
transatlantic A&D industrial cooperation with America and its mega-primes. For Europe’s business
executives, the much-hoped-for benefits of closer collaboration with America (including potential
transatlantic mergers of equals) were access to the lucrative US defence market and its state-of-the-
art technologies. The business leaders driving the EADS deal forward were not mere puppets or
agents of their respective national governments. For the executives involved, joining forces to
create EADS and to collectively gain the critical mass necessary to compete with the American
mega-primes was a matter of survival. Taken individually, the French, German, and Spanish A&D
“national champions” were much smaller than Boeing, LMC or NGC. Even if Washington had
authorised full-fledged transatlantic mergers, these link-ups could never have been balanced merger
of equals because of significant size differences between the respective European and US firms. In
this situation, combining several of the European “national champions” to create EADS seemed to
the best – if only – way forward.
To put the EADS merger into its proper European and transatlantic context, one must also analyse
the interests and motivations of the political actors involved. Paris and Berlin (as well as Madrid)
had to approve this unprecedented full-fledged transnational link-up in a strategic sector of such
vital importance for their countries’ respective national security. Several factors both external and
internal to the EU spurred the bloc’s two leading powers – the Franco-German engine – to venture
into a political, strategic, and military territory (i.e., the EADS merger) where neither one of them,
nor any other countries in the world, had gone before. It is important to differentiate between
external and internal political factors pertinent to the creation of EADS. Externally, the end of the
Cold War had drastically reduced Europe’s strategic dependence on the US. During the 1990s, with
the Soviet threat gone and America emerging as the world’s sole superpower, one could witness an
increase in transatlantic tensions over a number of issues, ranging from the ICC and the Kyoto
Protocol to the French-led attempt to build an EU security and defence capability autonomous of
NATO. The ESDP effort, in particular, raised American suspicions that Europe was trying to
position itself as a counterweight and political-strategic competitor to Washington. In trade and
business, after all, US and European companies were already competing head-on in a vast range of
sectors, including, very importantly, the A&D industry (Airbus vs. Boeing, etc.).
Beginning in the 1990s, French-led ESDP ambitions and fundamental transatlantic differences over
the rules and constraints imposed by international law and multilateral organisations put the Old
Continent at odds with the American superpower. At the external level, it was therefore relatively
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easy for key EU members like France and Germany to come to think of America as “the other” –
that is, the crucial if not indispensable element in any collective identity-building process.
Transatlantic political differences with Washington, coupled with the preponderance of US power
in the international system, naturally called for selective European counterbalancing against the
American hegemon. Here again, realism provides the most appropriate analytical framework to
explain (Continental) European anti-hegemonic counter-balancing actions vis-à-vis the US
superpower during the 1990s. For sure, neither Paris nor Berlin had the ambition or capacity to turn
the EU into an all-out strategic / military competitor to the US. Even extremely far-reaching neo-
Gaullist aspirations notwithstanding, such an ambitious full-fledged counterbalancing project would
have been certainly doomed to fail. However, the unwillingness and inability by Paris and Berlin to
transform the EU into an all-out strategic / military competitor rivalling the US did not mean that
the two countries were not able to get their act together when core national security and economic
interests – i.e., the need to maintain capable, technologically advanced and internationally
competitive A&D companies (including their respective national champions as well as Airbus) on
their territory – were threatened by the American mega-primes. From the perspective of Europe in
general, and of that of France and Germany in particular, the rapid ethnocentric consolidation of the
US A&D industry (especially in the context of the BMD merger) seemed to be part of America’s
ambition to preserve its post-Cold War superpower status and prevent the rise of any potential peer
competitors (including its European NATO allies).
The perceived competitive threat posed by the BMD merger was compounded by the fact that any
weakening of Europe’s (relative) economic and technological position in the international A&D
industry was bound to have a corresponding negative impact on its ability to act collectively as an
independent security and defence policy player (that is, outside of NATO if necessary). For
example, the Kosovo War in the spring of 1999 served as a powerful reminder of Europe’s dramatic
military and technological deficits compared to the US and subsequently made the strengthening of
the Continent’s A&D industrial capabilities an important priority for policymakers in Paris, Berlin,
London, and beyond. In this context, it is noteworthy how the governments of the major EU arms-
producing countries (LoI members France, Germany, Italy, Spain, the UK, and later Sweden)
repeatedly emphasised the crucial role played by the A&D industry in terms of providing the
underlying basis for the power-projection capabilities necessary to conduct EU-led security and
defence operations abroad. In the context of the RMA debate during the 1990s, airpower was seen
as an indispensable element of network-centric warfare in the future. In April 1998 the defence
ministers of France, Germany, Italy, Spain, and the UK issued a Joint Statement confirming that “a
strong, competitive and efficient defence industry is a key element of European security and
285

identity as well as of the European scientific and technological base”. 1382 In their July 1998 LoI, all
six European countries even agreed to “accept mutual interdependence and the possibility of
abandoning industrial capacity”. The American hegemon, in contrast, would never have signed off
on such a sweeping statement; for Washington it was of paramount importance to maintain
unmatched technological superiority in all relevant sectors with a maximum degree of industrial
independence and autonomy – even vis-à-vis close Western allies. In the A&D industry, “high
politics” and “low politics” are inextricably intertwined.
On the internal European level, the creation of EADS also reflected the fact that during the 1990s,
key EU members like France and Germany had made great strides in terms of advancing Europe’s
economic and political integration. For example, the founding members of the Eurozone – which,
interestingly, included the two EADS partners France and Germany, but not the UK – decided to
create a common European currency; an unprecedented step that required the pooling of national
sovereignties and the corresponding acceptance of major political, economic, and financial
interdependencies. In fact, even the launch of the Euro can at least partly be interpreted from a
realist perspective, namely as a Franco-German-led attempt to provide the necessary macro-
economic and financial framework to improve the EU’s competitiveness compared to other major
regional blocs in the world – notably the US.
The great political importance attached by Paris and Berlin to the creation of EADS was also
illustrated by the fact that French Prime Minister Jospin and German Chancellor Schroeder
participated in the signing of the EADS founding agreements in Strasbourg – a city symbolic of
Franco-German reconciliation and European integration – in October 1999. In early December
1999, Spanish Prime Minister Aznar was again joined by his Franco-German counterparts on the
occasion of CASA’s entering EADS. The fact that top government leaders from France, Germany,
and Spain were present at the creation of EADS underscores the important political dimension of
this unprecedented transnational A&D merger. EADS was not a “normal” cross-border M&A
transaction in Europe. For sure, one could argue that the direct EADS shareholdings of the French
and Spanish governments were the reason why Prime Ministers Jospin and Aznar participated at the
signing ceremony for the new company. However, when French and Dutch flag carriers Air France
and KLM announced their merger in 2004, neither the French nor the Dutch prime ministers were
present. 1383
1382 Annex A, Joint Statement of 20 April, LoI
1383 As a result of this merger, the French government’s stake in Air France dropped from 54.4 to 44 percent.
286

Finally, realism can also account for BAe’s decision to pull out of the merger negotiations with
DASA and to join forces with GEC-Marconi instead. According to realist theory, there are two
basic strategies to deal with a hegemonic power in the international system. The first approach is to
try to balance against the hegemon, namely by forging countervailing alliances with like-minded
states in the international arena; the second strategy is to bandwagon with the hegemon, that is, to
support the hegemonic power in an attempt to safeguard one’s own survival or to share in the
hegemon’s spoils of conquest. From BAe’s perspective, agreeing to a full-fledged merger with the
German and French “national champions” would have been tantamount to attempting to balance
against the American hegemon. In particular, the eventual participation of France in a British-
German UK-DASA tie-up would have risked raising serious suspicions in Washington about the
trustworthiness and ultimate political orientation of the UK’s biggest A&D company. GEC-
Marconi’s Tracor acquisition had demonstrated that UK firms were granted unprecedented access
to America’s defence industrial base because of the UK-US “special relationship”. A full-fledged
BAe merger with one of its Continental European counterparts would have dealt a serious blow to
the company’s efforts to expand into the American A&D market. It is interesting to note that Tony
Blair’s pro-EU government preferred that BAe join forces with the German and French “national
champions” rather than merge with GEC-Marconi. Ultimately, however, the BAe leadership –
without being over-ridden by government direction – decided otherwise and opted for the creation
of a UK “hypernational champion” instead. Clearly, the Blair government was not following the
dictates of realist theory.
In realist terms, BAe’s decision is tantamount to bandwagoning with the US hegemon. For BAe, the
hoped-for benefits of staying on good terms with the Americans – i.e., improved access to the vast
US defence procurement market, etc. – outweighed the anticipated benefits derived from a potential
pan-European German-Franco-UK A&D tie-up. Rather than joining an emerging European alliance
to balance against the American hegemon, BAe’s leadership reasoned that it was better off if it
stayed clear of Continental “entanglements” and pursued a decidedly US-focused corporate strategy
instead. After all, it was the American superpower – and not European countries like France or
Germany – that would have the necessary resources to award lucrative procurement deals worth
hundreds of billions of dollars in the future. BAE System’s subsequent decision to sell its 20
percent stake in Airbus is further evidence of the company’s major strategic reorientation and focus
on the US market. Given BAE’s successful transformation into one of the top US defence
contractors, a 20-percent stake in Airbus – a company widely criticised in America for its alleged
improper reliance on European government subsidies – could have created perceived conflict of
interest issues and / or raised potential doubts about the national security trustworthiness of the
287

British firm. By selling its 20-percent stake in Airbus, BAE left no doubt about the fundamental
priorities driving its corporate strategy: America first, Europe second. The EADS merger, in
contrast, was driven by a different logic: Europe first, America potentially second (in terms of a
transatlantic merger-of-equals with a US mega-prime).
By analysing the different consolidation processes in the American and European A&D industries
during the 1990s, this thesis provides new, relevant insights into the potential for international
competition and cooperation, both among states and companies. States compete with each other for
power, wealth, status, prestige, etc. in the international system (“high politics”). Companies
compete with each other for profits, markets, innovative technologies, etc. in the globalised
economy (“low politics”). A&D companies are unique in the sense that they sit at the intersection of
both political worlds. The A&D industry’s relative performance and technological sophistication
has a direct impact on the national security and economic competitiveness of its respective home
countries.
This thesis also examined the question as to which actors – national governments or private-sector
companies – were the driving forces behind the A&D industrial consolidation processes in America
and Europe. In the US, it was the government, led by the Pentagon, which took the lead in
convening the 1993 “Last Supper” and convincing the assembled business leaders that they had no
choice but to “consolidate or die”. Washington facilitated the consolidation processes by relaxing
anti-trust restrictions and absorbing some of the M&A related adjustment costs. In America, the
government played a crucial role in initiating the consolidation process; afterwards, however, it was
up to the privately owned A&D companies to work out the details: who merges with whom? Who
sheds which business areas, etc.? While the US government did little to micromanage the actual
consolidation process during the 1990s, the Pentagon stepped in again after a new leadership there
felt that the “urge to merge” had gone too far and that it was time to rein in the private sector to
maintain a certain minimum level of competition among different US mega-primes. As a result, the
proposed LMC-NGC mega-merger was blocked; a sudden change of heart on the part of
Washington causing surprise and dismay among the business leaders involved. The decision also
marked the end of the “merger mania” era in the American A&D industry.
In Europe during the 1990s, in contrast, the competitive threat posed by the rapidly consolidating
American mega-primes was first recognised by the A&D companies themselves. Relevant industry
associations and the EC began to frame the issue as part of the Old Continent’s long-standing
concern about a (widening) “technology gap” vis-à-vis the US; an urgent issue that required a
288

coordinated response to ensure the continued independence and survival of the European A&D
industrial base. The private sector took the lead in defining the problem and putting it on Europe’s
political radar screen. Earlier types of “technology gap fever” had already struck the Old Continent
back in the 1960s, 1970s, and 1980s without causing any major transnational mergers in the A&D
sector. In this context, the Airbus consortium stands out as the most successful, if only, collective
European response to “le défi américain”. During these earlier times, the challenge was primarily
defined in economic-technological, i.e., civilian terms. In the 1990s, in contrast, the new American
challenge also acquired a deeper strategic dimension: a competitive European A&D industrial base
was seen as an indispensable element of a stronger, more capable EU that can autonomously
safeguard its international security interests even without American backing.
While the negotiations about the potential transnational consolidation of the European A&D sector
(e.g., EADS, BAe-DASA, DASA-CASA) were initiated and driven by private-sector executives, it
is also clear that the talks would not have taken place and could not have been concluded
successfully (in the case of the EADS merger) without the political backing of the respective
national governments. It is fair to say that Paris, Berlin, London, or Madrid would have intervened
(either openly or behind the scenes) to block a cross-border consolidation transaction involving
their “national champions” that was deemed harmful to their national security interests. It was only
after Europe’s key governments had recognised that “business as usual” was no longer an option
that full-fledged transnational A&D mergers like EADS were seriously contemplated by the
private-sector executives. Also, Jean-Luc Lagardère and Juergen Schrempp would not have been
interested in forming EADS if it had not been for the French government’s decision to at least
partially privatise Aérospatiale. Here again, real progress on private-sector-led A&D industrial
consolidation required the appropriate political framework (i.e., the green light on partial
privatisation from Paris).
This thesis conclusion provides not only a summary of its analytical findings, but it also identifies
suitable areas for further academic research. The first question that merits in-depth analysis
concerns EADS’s post-merger integration and the extent to which Paris and Berlin have attempted
to exercise national political influence over the European aerospace giant. France’s government,
which maintains a direct 13-14 percent stake in the company, has been particularly vocal in terms of
its involvement (critics would say “interference”) in strategic EADS management matters,
including trying to decide which French or German executives should be nominated for key
leadership positions within the EADS / Airbus group. As a result, Berlin has repeatedly felt
compelled to push back to make sure that Paris does not engineer a silent take-over of EADS that
289

would impose (French) political and strategic priorities over commercial decisions. To this day,
EADS insiders readily acknowledge that the company is still sharply divided along national lines.
As so often with large-scale international M&A transactions, cultural differences rank among the
biggest and most stubborn obstacles to effective post-merger integration. In the case of EADS,
things are made even more difficult by the company’s strategic importance and the fact that Paris
and Berlin are suspiciously watching each other’s every move to make sure the other side does not
gain undue influence or control over the firm. There can be no doubt that the Franco-German
political infighting at EADS has left the company at a serious disadvantage compared to its more
unified and streamlined ethnocentric rivals.
The second area for further academic research concerns the political backlash in America against
on-going European efforts to penetrate the US defence procurement market. In recent years,
European A&D companies seem to have made some progress in terms of successfully competing
for important American procurement deals. In January 2005, the Pentagon selected a joint
consortium formed by Anglo-Italian helicopter maker AgustaWestland and LMC over its American
competitor Sikorsky to build the next-generation Marine One helicopter for the US President. At
the time, the US$1.7 billion landmark deal was primarily interpreted as an important victory for
Prime Minister Tony Blair and his Italian counterpart Silvio Berlusconi, both of whom had
supported the Bush administration in the controversial 2003 Iraq War. The jury is still out as to
whether transatlantic defence procurement has been transformed from a “one-way street” into a real
“two-way street” where European companies have a real shot at securing major, multi-billion dollar
deals.
The Pentagon’s decision in February 2008 to award a US$35 billion refuelling tanker contract to a
transatlantic consortium led by NGC-Airbus could have easily been interpreted as the most visible
sign yet that the protectionist “Fortress America” mentality that was so prevalent in Washington for
so long was finally coming to an end. However, ousted rival Boeing launched a massive political
lobbying campaign on Capitol Hill against “the French tanker” and also filed a protest with the
independent Congressional watchdog GAO. The GAO’s non-binding report published in July 2008
found “that the Air Force had made a number of significant errors that could have affected the
outcome of what was a close competition between Boeing and [NGC].” 1384 As a result, the GAO
recommended that the “Air Force reopen discussion with the offerers, obtain revised proposals, re-
evaluate the revised proposals, and make a new source selection decision, consistent with the
1384 GAO (July 2008) p. ii
290

GAO’s decision” 1385 . Just a few weeks after the GAO report, Defense Secretary Gates announced
that the Pentagon would conduct a new “fast-tracked” KC-X competition and announce the winner
by the end of 2008. That deadline passed and it is now up to the more protectionist-minded Obama
administration to make the ultimate decision about the urgently needed KC-X program. Feeling that
the Obama administration had established new KC-X selection criteria that clearly favoured
Boeing, NGC pulled out of the tanker competition in March 2010, while EADS is still weighing
whether to launch another Pentagon tanker bid. As it happens, Boeing is now headquartered in
Chicago, the political home of President Obama. And even if Airbus were to win the competition a
second time around, the multi-billion dollar funding would still need to be approved by Congress.
Given that protectionist Democrats and Republican national security hawks are powerful players on
Capitol Hill, closer transatlantic defence industrial integration is likely to remain an elusive goal for
years to come.
The third and final potential research area concerns the impact of the BRIC 1386 countries’ political,
economic, and military rise on the competitive dynamics shaping the A&D industry in America and
Europe. China has made it a national priority to create technologically sophisticated and
internationally competitive A&D companies that will boost the country’s on-going transition to
great-power status. In particular, Beijing is attempting to get access to leading Western technologies
by demanding teaming and assembly arrangements with Airbus and Boeing as “deal sweeteners”
for multi-billion dollar aircraft acquisitions in the rapidly expanding Chinese commercial airline
market. Russia has also attempted to forge closer links with EADS / Airbus and Boeing. In 2006,
then state-owned VTB bank acquired a five-percent stake in EADS “to seek technology-sharing
partnerships and Airbus manufacturing work”. 1387 France and Germany rejected Russian demands
to get a seat on the EADS board and made it clear that they were not interested in a strategic
partnership with the Russian A&D industry. In the meantime, Italy’s Finmeccanica teamed up with
Sukhoi to develop the regional Superjet 100 aircraft, with major subcontracting and consulting
work performed by Boeing. Brazil’s Embraer is already a major international player in the rapidly
growing regional jet market; a position it could build on to help mount a collective international
challenge to the Boeing-Airbus duopoly in the large commercial aircraft segment. In their
aggressive competition for lucrative export opportunities abroad, Boeing and Airbus have in recent
years been forced to provide unprecedented outsourcing and off-shoring opportunities to aerospace
companies located in Japan, China, India, etc. This proliferation of state-of-the art Western
technology (coupled with IP violations and / or industrial espionage) could soon help turn these
1385 GAO (June 2008) p. 67
1386 BRIC = Brazil, Russia, India, and China
291

aerospace firms into formidable peer competitors. Boeing and Airbus would be clearly worse off if
they lost their current duopoly-style dominance in the large aircraft market to emerging rivals from
the BRIC countries and beyond. Are the European and US aerospace industries in general, and
Airbus and Boeing in particular, therefore finally moving closer together to better defend against
new potential rivals? How will Western governments responding to protect their A&D companies
against the growing investment clout of ultra-rich SWFs 1388 from the BRICs and elsewhere? The
enormous political, military, economic, and technological power and prestige derived from the
A&D industry will ensure that this strategic sector remains a uniquely important, high-stakes
battlefield involving states and companies on a global scale.
1387 Robertson (2007)
1388 SWF = Sovereign Wealth Fund
+++
292

Annex
Table 1: Economic Weight of the US Aerospace Industry
Civil Jet
Imports
(Millions of
Dollars)
Civil Jet
Exports
Surplus of
Commercial
Sector
Military Jet
Imports
Military Jet
Exports
Surplus of
Military
Sector
Total
Aerospace
Industries
Surplus
Total
Military
Aircraft
Shipments
Total
Commercial
Aircraft
Shipments
Employment
(in
Thousands)
1990 1991 1992 1993 1994 1995 1996 1997 1998
8,251 9,268 9,719 8,628 8,792 8,296 9,881 12,976 16,837
31,517 35,548 36,906 31,823 30,050 25,079 29,477 40,075 51,999
23,266 26,280 27,187 23,195 21,258 16,783 19,596 27,099 35,162
3,550 3,735 3,943 3,555 3,571 3,213 3,787 5,159 6,273
7,566 8,239 8,111 7,596 7,322 7,991 10,792 10,299 12,072
4,016 4,504 4,168 4,041 3,751 4,778 7,005 5,140 5, 799
27,282 30,784 31,355 27,236 25,009 21,561 26,601 32,239 40,961
1,053 911 753 954 766 816 558 511 418
2,268 2,181 1,790 1,630 1,545 1,625 1,662 2,269 3,122
840.7 784.0 710.5 624.0 552.1 514.4 514.2 554.9 578.6
Sources:
- Aerospace Industries Association (based on reports from member companies)
- General Aviation Manufacturers Association
- Department of Commerce’s International Trade Administration
293

Table 2: US Aerospace Trade Balance 1981-2001*
* includes aircraft, missiles, space vehicles, and parts)
Source: Aerospace Industries Association
Table 3: US Aerospace Export Share of Production
Source: Aerospace Industries Association
294

Table 4: FY1987-FY2007 DoD Budget Authority
Source: National Defence Budget Estimate for FY2003, Office of the USD (Comptroller)
295

Table 5: Consolidation in the US A&D Industry 1980-2001
Source:
Commission on the Future of the United States Aerospace Industry (2002) p. 7-4
296

Interviews:
Cohen, Eliot, Robert E. Osgood Professor of Strategic Studies at the Paul H. Nitze School of
Advanced International Studies (SAIS) at the Johns Hopkins University, author interview in
Munich on 9 February 2007.
Cole, August, Defence Industry Reporter, The Wall Street Journal, various author interviews during
2008-2009.
Davis, James W., Chairman, Centre for Security Economics and Technology, University of St.
Gallen, various author interviews during 2007-2010.
Enders, Tom, President and Chief Executive Officer of Airbus, author interview in Munich on 27
November 2009.
Gansler, Jacques S., former US Under Secretary of Defense for Acquisition, Technology and
Logistics (1997-2001), author interview at the University of Maryland on 17 July 2007.
Hamre, John, former US Deputy Secretary of Defense in the Clinton administration (1997-2000),
and current President and Chief Executive Officer of the Center for Strategic and International
Studies (CSIS), author interview in Washington, DC on 10 May 2007.
Helm, Robert, Corporate Vice President, Government Relations, Northrop Grumman Corporation,
various author interviews in Washington, DC and Munich during 2007-2010.
Hughes, Peter C., President, Croton Institute, various author interviews in Washington, DC during
2007-2010.
Jackson, Bruce, former Director of Global and Corporate Development at Lockheed Martin
Corporation (1993-2002) and Founder of the “US Committee to Expand NATO”, author interview
in Washington, DC on 25 June 2009.
Kaminski, Paul G., former US Under Secretary of Defense for Acquisition and Technology (1994-
1997), author interview in Washington, DC on 15 May 2007.
Niblett, Robin, former Executive Vice President of the Center for Strategic and International
Studies (CSIS) (2001-2007), various interviews during 2006-2007.
Schmitt, Burkard, then-Deputy Director of the WEU Institute for Security Studies (ISS), author
interview in Paris on 8 March 2001.
von Nordheim, Manfred, former Senior Advisor to the President and CEO of EADS North
America, various author interviews during 2005-2009.
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